Over the month of August, the stock markets finally appeared to be catching up to reality after years of over-exuberance among investors, with the Dow Jones Industrial Average sinking 800 points mid-month after the bond market indicated a yield curve inversion.
As virtually every major media outlet pointed out in the days that followed, an inversion is often a reliable signal that the economy is barreling toward recession. Penny stocks subsequently took a wild ride over the next few weeks as investor concern around a potential economic crisis intensified.
A great deal more volatility related to recession worries (and flights to safe haven assets) should continue to be seen over the month of September, in my view. I also believe that short-term traders with a keen eye for technical analysis could benefit hugely over the next year from all of these swings in prices.
In this month's article, I'm looking at some especially intriguing stock ideas with candlestick patterns that, in my opinion, demand further investigation. These include ones with bullish marubozu patterns and low relative strength indexes (RSI) – both of which are among my favorite technical indicators and suggest significant gains ahead for some savvy investors who are willing to put the work in.
Due to the time constraints inherent to technical analysis, some of the patterns, signals, and set-ups I describe below may no longer be relevant or intact as of the time you read this article. Please ensure you conduct your due diligence when looking at the trading charts and data for the following stocks.
Many of the stocks mentioned here were also profiled, traded, or otherwise discussed in the Peter Leeds Newsletter. Peter may furthermore own shares in some of the investments mentioned, in which case that fact will be clearly indicated.
Mechel PAO (MTL)
Russian steel giant Mechel PAO (MTL) has a dismal current ratio of 0.20 and an even grimmer quick ratio of 0.10. Ordinarily, with a balance sheet like that, I wouldn't give Mechel stock the time of day.
However, on closer analysis, a P/E ratio of 1.16, forward P/E of 3.95, and P/S of 1.12 make the stock look like a much more tempting proposition. Meanwhile, sales over the past five years have averaged 106% growth, and in the most recent quarter, revenue grew another 106% on top of that.
For the purposes of this technical analysis article, however, I'm most interested in the imperfect bullish marubozu that had appeared on Mechel's chart as of Aug. 26 (which was substantiated by strong trading volume of close to 150,000). One of the most bullish candlestick trading patterns around, the marubozu suggests that Mechel shares could be moving back up to the $2 level again in the near term.
Genesis Healthcare, Inc. (GEN)
Genesis Healthcare, Inc. (GEN), which runs nursing homes and assisted/senior living facilities, has had a rough year, with shares tumbling almost 40% since the beginning of 2019. A recent morning star pattern, however, might suggest that the tables are turning for the beleaguered stock, particularly with an inverted hammer showing up at the end of August and an 8.30% increase in price over that time.
In the days ahead, I'll be looking for shares to rise above the $1.15 resistance level. If they can do so, then I have high hopes for Genesis Healthcare stock skyrocketing much further in the next few months.
Trinity Biotech plc (TRIB)
After a 37% drop in value over the past month, a few days of spinning tops for Trinity Biotech plc (TRIB) at the end of August may be heralding a new uptrend for the stock. Typically, the spinning top (which looks like a bulkier doji or cross shape on the chart) represents investor indecision at the end of a long price trend. Because I'm seeing several of them on Trinity Biotech's charts – with stronger-than-average trading volume to boot – I believe the chances are good that the company's fortunes may be changing.
Add to that Trinity's new HIV screening product (Trin-Screen), which is due to be submitted to the World Health Organization by the end of the year, a possible bullish marobuzu forming at the end of August, and a low RSI of 33, and in my opinion, Trinity Biotech stock is looking pretty cheap right now at $1.42.
Endeavour Silver Corp. (EXK)
Given all the market turmoil of late, I'm feeling very bullish on the precious metals sector – and that goes double for Endeavour Silver Corp. (EXK). In addition to silver historically taking on "safe haven" status amid a recession, the technical set-up has also been looking promising for Endeavour Silver.
With some caveats. To wit, back in July, the Canadian silver miner saw an extremely bullish three white soldiers pattern (actually, four of them in this case) on top of much stronger-than-usual trading volume. Granted, that pattern is old – so old that I hesitate to even mention it. But so far, it has failed to play out quite as strongly as it should have due to the company releasing some disappointing earnings results on Aug. 8.
Despite that failed signal, I nonetheless believe that the stock still has a lot of upside ahead of it – far more, even, than the overall 47% price growth Endeavour Silver has achieved in the past quarter alone. The full impact of the three white soldiers pattern may have been delayed, but I still think it's just around the corner.
Suffice it to say, I'll be watching this one extra-carefully for bullish candlestick patterns in the days ahead. A morning star pattern around the middle of August, coupled with a 10% rise in prices over the month, may be just the beginning.
- A penny stock refers to a small company's stock that typically trades for less than $5 per share.
- Although some penny stocks trade on large exchanges such as the NYSE, most penny stocks trade via over the counter (OTC).
- While there can be sizable gains in trading penny stocks, there are also equal risks of losing a significant amount of an investment in a short period.
- Technical analysis techniques can help spot potentially profitable trades in penny stocks.
IAMGOLD Corporation (IAG)
As with Endeavour Silver, I'm expecting a lot of positive momentum for junior miner IAMGOLD Corporation (IAG) over the next year or two. (Indeed, the stock is up over 50% in the past quarter alone.)
If you've been tuning in to the Peter Leeds YouTube channel, then you'll already know that this reappraisal of the precious metals stocks is coming not a minute too soon, after silver and gold spent a ridiculously long time being relegated to the status of the most unloved penny stocks on the market.
I'm especially liking IAMGOLD's strong balance sheet at the moment, which features low debt/equity ratios and a more-than-decent current ratio of 4.10. The technical signals also look highly bullish to me, with a morning star pattern appearing a few days after the stock dropped 60 cents earlier in August.
This favorable pattern in turn seems to have been confirmed by the two imperfect bullish marubozus that appeared in the last week of August and the simultaneous 10% growth in prices. If these positive signals hold up, then I think we can expect to see more gains over September and October.
Eagle Bulk Shipping Inc. (EGLE)
Despite spectacular earnings per share (EPS) numbers and a forward P/E ratio of 9, Eagle Bulk Shipping Inc. (EGLE) has been stuck in a stubborn sideways rut over the month of August. While prices did explode in July to soar to the $5.75 level, the stock has returned all of its ascent and then some since then, for an overall 8% loss over the past month.
A dispiriting performance, to be sure – but a change may be in the wind for this shipping firm. The appearance of the three white soldiers pattern in the last days of the month, as well as a number of spinning tops indicating investor uncertainty, could mean that the market is beginning to take a more bullish stance on the stock.
Accuray Incorporated (ARAY)
My interest in Accuray Incorporated (ARAY) was first roused by its rock-bottom (and therefore positive) RSI of 19.97, which is among my favorite technical indicators. Why do I like it so much? First, it’s easy to see, with most trading websites listing the RSI clearly alongside the company's other stats. And second, it is often remarkably accurate in its ability to reveal whether a stock is oversold or not.
In the case of Accuray, the very low RSI is spelling it out loud and clear: Accuray prices should rise again, in my view. Some very recent spinning tops at the end of August's long downtrend could, furthermore, reveal investor indecision, and a transition from a bearish to a bullish mindset. I'll be watching Accuray stock closely.
SPAR Group, Inc. (SGRP)
SPAR Group, Inc. (SGRP) describes itself as providing "merchandising and marketing services worldwide. The company offers syndicated services, such as product reordering and replenishment; ensuring its products for distribution; adding new products; implementing store planogram schematics; setting product category shelves; ensuring that product shelf tags are in place; checking for salability of the clients' products; placing new product and promotional items in prominent positions; and kiosk replenishment and maintenance services for retailers, manufacturers, and distributors."
These services have afforded SPAR Group somewhat subdued but steady revenue growth of approximately 15% over the past five years, as well as some spectacular quarterly EPS growth of 185% in the company's most recent results.
The stock was already up around 56% over the month of August, but my technical analysis suggests it could rise even further in September. The last 10 days of August or so witnessed a huge gap up to a highly bullish if imperfect three white soldiers pattern, which culminated in an also slightly imperfect bullish marubozu candlestick.
If trading volume can increase again to its earlier highs, I would expect to see SPAR Group shares moving significantly higher over the autumn months. Admittedly, the RSI at 80 is high here, which gives me pause. I would keep a very tight stop loss on this one.
The Bottom Line
The news is official: economic pain is on the way for many of the investors who profited from the stock market's decade-long bull run. As I've been talking about on the Peter Leeds YouTube channel, however, a certain strategic mindset can help short-term traders stay ahead of the game.
The ability to embrace risk, paired with a close attention to the most minute details of the trading charts, may be all you need to come out of 2019 with your investment portfolio not only intact, but actually benefiting from all the volatility in the air.
Penny stocks are volatile and can generate catastrophic losses. Price levels in this article are hypothetical and do not represent buy recommendations or investment advice. Keep in mind that it's your responsibility to make trading decisions through your own skilled analysis and risk management.
Peter Leeds is the author of several books, including the international bestseller, "Penny Stocks for Dummies." He and his team also issue a newsletter devoted exclusively to penny stock picks and analysis, as well as a popular YouTube channel PeterLeedsPennyStocks.