Technical Analysis Shows Large Buyers in this Penny Stock

When it comes to investing in penny stocks, there are many factors to consider. Along with fundamental information, one area that I find just as important is technical analysis. The technical analysis of a stock chart will help you understand better what other investors are doing with their money. Frankly, I think talk is cheap and action speaks volumes. Regardless of what a company representative or other analyst might say about penny stocks, if the technical analysis appears poor, this means people aren’t buying shares and that worries me.

There are no guarantees in either fundamental or technical analysis when it comes to penny stocks, but what we can learn will certainly help our overall judgment of the stock. Aehr Test Systems (NASDAQ/AEHR) is one of several penny stocks with some interesting technical analysis indicators. This is an extremely small micro-cap stock with a market capitalization of only $11.0 million. The company is involved in the dynamic random access memory (DRAM) sector, developing systems for testing and enhancing reliability for the end client.

Aher Test Systems Technical Analysis Chart-I

Chart courtesy of www.StockCharts.com

The first graph we will look at from a technical analysis point of view is a one-year daily chart. Generally speaking, in technical analysis, if the stock trades under its 200-day moving average, it’s considered bearish, and if the stock trades above the 200-day moving average, it’s considered bullish. Of course, at some point, there is a change in sentiment and the stock will reverse course. Note, however, the two circles denoting when the 50-day moving average crosses the 200-day moving average. After that point, investors who took opportunities to average into positions would have done quite well. Knowing when to get in is just part of the decision-making process; knowing when to get out is equally as important.

The first technical analysis warning sign that the bearish trend was changing occurred in January 2012. This is when the stock price exceeded the 50-day moving average. This was then followed by a move through the 200-day moving average at the end of March, which culminated in the Relative Strength Index (RSI) being overbought.

Following this overbought condition, technical analysis will tell us that consolidation is in order, which did occur when the stock pulled back to its 50% retracement level. The stock has since started moving back up and a sustained break through the recent high of approximately $1.60 is necessary for a continuation of this bull run. Any further selloff down to the 200-day moving average will most likely offer support, according to technical analysis.

Aher Test Systems Technical Analysis Chart - II

Chart courtesy of www.StockCharts.com

The three-year weekly chart shows some resistance is ahead for this stock. First note that, at approximately $0.98, we’ve seen this level as support and resistance going back to 2009. Once the stock exceeded this level in April, it continued before hitting long-term resistance, as seen by the downward sloping line. A move above $1.60 would indicate that the next level of resistance to watch out for is most likely $2.25.

While technical analysis does not guarantee any of these events will occur, it does indicate that buyers have been aggressively accumulating shares of this stock over the past few months. While we might not know what the total order to buy is, it appears that there are clear levels that other shareholders are watching as well. Of course, technical analysis is only one area to investigate. I would suggest researching the fundamentals of this or any of the other penny stocks you’re interested in before investing.

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