Blog : The Ultimate Penny Stock Tool

by Peter Leeds on April 5th, 2016

I never make a trade decision in penny stocks, whether a buy or a sell, without first checking in with my favorite research tool.  I explain below how to use this technical analysis indicator to guide you, instantly, to better trading decisions. 

Known as The Relative Strength Index (RSI), it combines momentum with shareholder activity, and produces a value which displays the overbought or oversold condition of the underlying shares.  Overbought shares almost always fall in price, while oversold shares almost always rise.

The RSI measures any stock, based on the trading activity leading up to the current point, with a value between 0 and 100.  Everything explained here is being overly simplified for the purposes of education, considering that you do not need to understand how the values are derived in order to use the indicator to the utmost benefit.

The Relative Strength Index for any stock is simple to check, and can be done in 7 seconds with a couple clicks.  It works for any size of company, but has an especially effective result with penny stocks specifically.

In fact, the RSI is one of the closest things there is in technical analysis to being eternally reliable.  It plays out exactly how we would expect time after time.

The idea is that any stocks with an RSI above 70 are overbought, meaning there has been too much buying.  The pool of prospective buyers continues to diminish, as more and more of them get the shares they want.  

When the RSI dips below 30, the shares have been oversold, meaning there has been too much selling.  Once everyone who wants to get rid of their shares has done so, the supply dries up, and the stock's momentum starts aiming higher.

Typically, overbought conditions, just like oversold conditions, reverse.  Too much buying (demand) eventually fades away, or overly-aggressive selling (supply) will reduce given time.  The shares then reverse direction from that point.

The further the Relative Strength Index is stretched, the more likely the stock will reverse, just like an elastic band.  If you were to see shares with an RSI of 85, you can know the investment is incredibly overbought.  An RSI of 90 is even more dramatically overbought, although you will rarely see such a level.

All things being equal, a penny stock with a Relative Strength Index of 25 represents a much more compelling short term trade than a penny stock with an RSI of 80.  The former will be likely to rise in the coming week(s), while the latter has a major probability of decreasing in price.

There are plenty of free and paid websites and brokerage tools which will display the Relative Strength Index.  For the purposes of explanation, I'll just walk you through some simple steps:

1.  Go to Bigcharts.com

2.  Enter IBM (or whatever ticker you would like to check) into the form field.  Try this will massive Blue Chips, or small penny stocks.

3.  Click "Advanced Chart" (not "Basic Chart")

4.  On the left-hand column, choose "Indicators"

5.  Select "Lower Indicator 1:", then choose RSI from the drop down list.

6.  Scroll down and click the orange "Draw Chart" button

You should now see the trading chart for IBM (or whatever penny stock or publicly-traded company you chose).  Across the bottom of the chart will be the Relative Strength Index, and what the RSI level has been over the duration of that chart.

The RSI level at the very right-hand edge of the chart is where the value sits currently.  For purposes of "checking your work," the IBM Relative Strength Index was at about 65 on April 5th.

We will be releasing a video explaining the RSI tomorrow, so be sure to subscribe to the Peter Leeds YouTube channel and get notified when it is released!

Also, be sure to check out our latest video - The Panama Papers Explained

 

Get Our Best Low-Priced Investments

  • don't have the time?
  • can't do all the work required?
  • want selections from the authority?

For only $199 per year, we give you our best high-quality, low-priced stock picks. Along with a full team, Peter Leeds is the widely recognized authority on small stocks. Start making money from penny stocks right away.