MagneGas Corp. (MNGA) has an interesting product with strong potential, but the penny stock has declined dramatically for several days in a row. (See also: MagneGas Drops Second Time Since Breakout.)

The company sells its proprietary MagneGas2 fuel, which is made from liquid waste. The company just secured a contract with the New York City Department of Transportation, has an agreement to deliver its gasification and sterilization systems for $2.65 million to a German company, counts a global automaker among its customers, and provides MagneGas2 to a major recycling and waste company.

MagneGas also plans to expand into Europe and continue pursuing markets in the United States, including the Gulf Coast and Florida. Despite all this, MNGA closed at 67 cents per share, down 5.6%, on October 31. It is a penny stock that has declined dramatically for several consecutive days.

In addition, the stock appears to have more downside to go, because the chart pattern shows that the stock’s 50-day moving average is below its 200-day moving average. This inversion is generally bearish. (See also: How To Use A Moving Average To Buy Stocks.)

None of this means MNGA is hopeless. But it does mean that anyone considering putting money in a high-risk stock like this needs to learn what to look for in both the chart and the fundamentals.

As far as the chart, it is important to wait for MagneGas stock to form base. At some point, if the share price stops falling, the stock will settle into a sideways pattern. This indicates buyers and sellers are jockeying for position, with neither side dominating. Then, after weeks, months, and sometimes years, a stock can break upward and deliver significant profits to investors.

This doesn’t just happen automatically. Due diligence means understanding how the company is doing. Investors would need to see improved revenue, income and cash flow.

This means a long wait is in store for MNGA, but this is the safest way to invest in penny stocks. Remember that there is no rule that says a stock can’t go to zero. Also, once you get in, if you change your mind, it can be difficult to sell your shares. Typically, there are not many buyers for penny stocks.