Technical analysis setup developing in microcap OTC BB
Thursday 03rd of March 2005 09:14:55 PM
Does Technical Analysis work on the OTCBB?
There has been debate about whether or not Technical analysis works or not on tiny microcap stocks such as those on the OTC BB. I am of the opinion that it does work, however I am also of the opinion that this tiny marketplace is not one to spend too much time on. It is definintely a very illiquid marketplace with much higher risk associated with it.
However, sometimes situations develop whereby an attractive enough chart setup occurs that it warrants mentioning. This is exactly that, an attractive chart setup. The downside is the liquidity issue. It is really horrible on the OTC BB market. Sometimes it can take 30 minutes or more just to get ‘into’ or ‘out’ of such a position. Despite the drawbacks, I seem to have found a very promising setup here.
The way in which I found this setup is very unusual. And maybe it speaks to the fact that a lot of stocks in general right now are moving on speculative merits only? A lot of small stocks that is. Whatever the reason, it is happening and I am reporting it to you.
Now back to how I found this little one… I was browsing through lycos live charts and there popped up a random chart from their server. It was indeed purely random. So there it was, and immediately after I saw it I knew it was worth investigating further. I have a good knack for this, simply looking at a chart very quickly and immediately ‘getting a read on it’. Kind of like you size up a person you meet for the first time.
Anyway, the chart is USTT and it trades on the OTC BB, the relatively illiquid and highly speculative ‘wild west’ exchange. Because I am a firm believer in technical analysis, it really does not matter to me what kind of stock, commodity or index I am analyzing. All the rules of technical analysis apply to each of them.
I have a little bit experience with the OTC BB stocks, so I know how to get a good read on them. I mentioned the liquidity issue above. This is true, yes. But sometimes there are periods that alleviate some of this drawback. For example right now I am seeing significant volume expansion on a number of them including USTT.
Actually the overall chart pattern setup on USTT is extremely attractive. If this were a large or mid cap stock, I would probably rate it a 9 out of 10. The pattern setup looks good to me because what you have here is a 7 to 8 month FLAT base (bottoming process) which is indication to me of accumulation. The high volume spikes within the green shaded area are some evidence of that accumulation. But then also, you have this based and accumulation building up right under a 1 year long resistance area. This one year long resistance area is indicated with the horizontal blue line. These two facts are very important in this analysis. Why? Because in my experience in technical analysis and reading stock charts over the years, this pattern identification is one of the most attractive stock chart pattern setups you can ask for. The reasons for this are simple. Number one, you have a stock that has shown us that it has completed its base during which there was accumulation. Then you also have an indication of a sign of strength with volume that takes price to a new level and holds that level. And, as you will see in the chart in the next paragraph or two, we also have an ascending triangle formation building on a nearer term basis ( a highly reliable chart pattern) right under the long term resistance line (long horizontal blue line). All of these factors together create a high probability breakout situation.
One other thing to mention is the weekly macd histogram. The weekly macd histogram shows a bullish divergence with price from the period of early 2004 until present. And, it also looks as if it is just about to crossover above the ‘zero line’ on the top half of the chart above. As I have said, I have seen these patterns many times before and I know from experience that they are high probability patterns. The fact that this is an OTC BB Stock does tarnish the setup a little bit, but nevertheless, in terms of strict technical analysis, the attractive setup still exists.
You can see from the next chart below more clearly the price pattern and the volume expansion as well as the ascending triangle. The dotted blue line represents the increasing demand meeting the fixed supply of the dotted red line. There is not much room left in the apex of the triangle, and USTT must either break down or up from this pattern. Heavy volume expansion would be the big clue that a breakout is in process. My forecast is that USTT will breakout upwards from this ascending triangle pattern.
It is also interesting to note that this company is somewhat of a play on the alternative energy theme I had mentioned in a previous post. Apparently they make an energy efficient vending machine accessory, saving buyers hundreds of dollars yearly. Another little hint about the speculative interest is the number of message board posts on USTT. I do not read or visit stock message boards, but in certain cases it is worth it for the sentiment side of the setup. The message board for this one at ragingbull.com has a high frequency of posts indicating ‘highly speculative fever’ if you will. While not mandatory, it is a useful indication of level of interest.
So in summary, USTT above .18 will probably launch into breakout mode for between 25 to 50% return potential.
P.S. I really don’t want to mention any more of these tiny ones for some of the reasons I mentioned above. But for now I am letting this one slip through, simply because of the unusual way it came to my attention. It did after all create a good story to write about…
P.P.S I am putting this post in the ‘Before and After’ category to see how this one shakes out. It should be interesting to follow up on.
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The energy sector and crude oil is going beserk. There is just no other way to say it and it runs along the theme which I continue to talk about which is commodities and energy. As of this posting, we can see that crude oil is in the process of doing a retest of the mid 50 level first achieved in late 2004. Note also that the price of crude since early 2003 is rising upwards steadily on a trendline arc.
So here is the chart of ESLR. As you can see it had a huge reverse head and shoulders pattern which has to this point resulted in a nice new trend and breakout. That huge reverse head and shoulders pattern also morphs on a larger scale into what appears to be a rounding bottom formation . The growing volume supports this overall pattern. The slow upward arc that defines the rounding bottom pattern (not drawn) should provide longer term support for ESLR. Recently the stock had a big move on improved margins and expansion plans and is a very high risk entry. Will likely see eventual pull back to the rounding bottom upsloping arc. ESLR could be a ‘longer term play’ as long as energy prices remain high or head higher. I do believe though that the Japanese are getting into this space as well. Also Siemens and General Electric… Plenty of competition for this tiny little company.. but still as I mentioned earlier, in the early stages, a rising tide lifts all boats…
That was a very attractive set up at that time and I do remember looking at CTQ and studying its overall pattern. The reason why it was such an attractive setup was because of its long flat base which was notable about 5 years long. If you ever see a security with a long FLAT base of that duration it is always a good potential situation for the future.. it may take many years to develop into anything but is still a good situation to keep an eye on. The long basing period is a great area of cause in price and provides ’support’ for an extended move. This situation currenly is also present in the long term price of silver. Long bases are a good thing. Although they do not appear to be too exciting they are worth watching just like those cheetahs watch their prey in the African desert.
But now we have come full cycle and a reversal of sorts is taking place. Commodities are now getting the upper hand. This does not necessarily mean that stocks and all paper assets are going to plunge into a bear market. The reason I say this is because even if there is an aggressive inflation stocks themselves can be inflated and while it may appear that they have a very high value, in reality it will not be so significant because of inflation itself. For example, even if the Dow Jones Industrial average goes to 20,000, it could very well be that a dollar bill at that time is only really worth 50 cents. Get my point?
This second little chart to the left is a close up zoom in of the actual rising wedge pattern of the commodity copper. The pattern is quite clear and easily identified. Technically, the upward slowing lines depict a gradually weaking demand situation. That is the dictionary definition in terms of technical analysis. But again, experience and a closer look at the commodity chart tells us maybe something else is going on.
Lets look at yet another chart and zoom in even closer. This chart is similar to the one I received from the reader mentioned at the beginning of this article. This is a much closer zoom in on the last 6 months or so and what we see here is an ascending triangle pattern. Isn’t that quite fascinating? The commodity copper chart at first glance shows us a possibly bearish situation. But then, looking closer at the chart in search of the truth we see that in the near term a very bullish technical analysis pattern exists. Indeed, not only is the pattern bullish, but it has already shown signs of an early breakout with volume. So, we have a smaller time frame very bullish and reliable pattern WITHIN a ’so-so’ technical pattern. Another good clue for us in determining where the commodity copper is going.
Aha! Yes, there is another clue dear friend and this time it comes from the S&P 500 index. Do you see that rising wedge on the S&P 500 index? Note how it broke out north of the rising wedge. This is a good, no not good, more like great example of how a rising wedge technical analysis pattern can turn into a very bullish situation. I remember specifically near the end of 2003 that many who study technical analysis were quite bearish at the time. I must admit I too was quite cautious during this time because I saw the rising wedge pattern and could not help concluding that indeed the pattern had some good potential for bearish implications. But it did not happen, it proved many people wrong and broke out north. Everyone became bullish during the period of that breakout, extremely bullish. And that marked the euphoric peak for almost a year in the S&P 500.
This chart to the left is of an actual commodity based copper stock. If you like stock charts and you consider yourself to be a pretty good technical analyst, then this chart will probably get your attention. It is a dream stock chart and a great example of how once a powerful trend sets in motion it is not likely to stop. Powerful persistent uptrend. The reason why this commodity based copper stock moved with such persistance is for no other reason than because the commodity copper price had its own very powerful upward rally in late 2003. This stock actually started moving before the upwards explosion in the commodity copper. This was definitely an very powerful online trading opportunity to those who were early and smart enough to identify the trend before it actually happened. So what is the name of this stock?
FCX, or Freeport Mcmoran, is the winner. That is the stock depicted in the larger chart above and in this smaller chart next to this text. This is a commodity based copper mining stock. Indeed this commodity based stock chart looks very attractive to me. On a scale of 1 to 10 with 10 being the most attractive I would rate it a 9. I rate it this high because the three blue arrows indicate a pretty reliable reverse head and shoulders pattern that has sustained itself on the longer term uptrend. Major bonus points for doing that! Also, read carefully my analysis in the paragraphs above this one. What did I talk about? The commodity copper and how its pattern and trend indicates a high probability that it will break out north in probably persistent fashion.
The Natural Gas price chart has broken a downtrendline with volume. What more can I say? It is starting to look bullish. And based on my analysis I see that NGAS the stock is ready to breakout, probably Friday morning. The virtual trade here is entry between 5.20 and 5.30 with stop loss set at 5.00. The objective is about 6.8. This looks like a very attractive set up to me with. Assuming entry at 5.20, maximum downside risk here is -3.8%, with first potential upside of about 30%.


The chart you see to the left of this text is the long bond. The esteemed Steven J. Williams posted an extraordinary editorial on a possible long bond crash
This next chart is a side by side comparison of the home building stock chart RYL or Ryland Group, and on the right is Yahoo. I am sure you remember the 2000 peak in many of the dot coms. A lot of them were faced with a situation of expanding and hiring too aggressively combined with a downturn in economic demand for their products and services… Might such a repeat situation now start with Ryland Group and other home builders? Well again, it certainily is a definite possibility. Home building companies that are expanding too rapidly, creating too much inventory of new homes, and leveraging themselves too much are at high risk. The Ryland chart on the left is a yearly price bar chart, note that if Ryland closes the year 2005 right about where it is now, it would in my opinion be a very bearish indication for 2006 for this stock. It would create a yearly shooting star and set Ryland up for a plunge into 2006. The other thing that is worth noting about the Ryland chart is that it seems to me at least it has used up most of its cause. This kind of move is unsustainable without some kind of consolidation.
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