There are several charting methods to identify highs and lows that you can use if you want to short penny stocks. Because many unscrupulous company promoters use a strategy known as pump and dump, you want to be in a position to make money even if the whole thing is an outright scam. Just as company promoters use the pump, which is nothing but an escalation in the stock price artificially created, to unload their holdings, you are betting that the prices will collapse and that you will make money when stock prices go down. One way of identifying the pump and dump is to use candlestick charts where price movements are charted through formations known as candlesticks. In these candlesticks, you can set the formation for different periods of time such as one-month or one year and then use the information from the different charts to determine the direction of the price.
You can, for instance, use a six-month chart in combination with a five-minute chart. Once you have identified a penny stock that you would like to short, first set up a six-month candlestick to familiarize yourself with price movements over this time frame. You then use a five-minute candlestick to check if the increase in price is slowing down and if support and resistance levels are forming. The five-minute chart will give you an indication of when you should enter the market and at what price. You can also choose to use other complicated technical indicators but they are difficult to learn and difficult to interpret.
To identify a pump in progress, you should look for a pattern where there is a huge jump in price in a relatively short period of time [for instance say 500 percent in a few days] which is not justified by any concrete developments and is just based on hype and news that cannot be verified. When the candlestick chart shows the formation of large red candles, it is an indication that prices have or are about to peak. This also means that prices are about to fall and you should get ready to move in. Instead of jumping in at the very top, you should wait for further confirmation that the price is on its way down. If you see on your charts that a support level has been breached, it is safe to assume that the stock price will continue to head south.
Another useful strategy is to concentrate on intraday price movement rather than movement over a few days. Because of the concentration on the short term, you would only need to use five-minute candlestick charts. You should look for penny stocks that gain city five percent in the early hours of trading and surrender these gains either substantially or completely towards the end of the trading day. Instead of shorting the stock immediately you spot the decline, you can seek confirmation of that trend and enter the market when the price drops to say five percent below its starting point.