The debate over whether or not technical analysis tools should be used to trade penny stocks has been a long and hard-fought one. Charting analysis is still somewhat rare within the large cap and mid cap world, primarily because investors just have a hard time trusting an idea other than 'value'. To apply something that's already rare to the world of penny stocks - which is inherently unpredictable to begin with - is often seen as playing with gasoline near an open flame..... you don't want to do it.
But should you? Is it possible to use technical analysis to successfully trade penny stocks?
The answer to the question isn't an outright 'no'. The answer to the question is answered with more questions. Namely, how do you intend to apply it, what do you expect to achieve, and is the penny stock in question a worthy charting analysis candidate?
How is technical analysis going to be applied to this penny stock?
Most technical traders use a specific charting event or set of events to make buy/sell decisions. But, they use this 'system' religiously, and trade whichever stocks the signals apply to, (usually) regardless of size. This is as it should be. By so doing, the overall success or failure of the system can be back-tested and monitored, and changed as needed.
Many penny stock traders, however, tend to apply technical analysis to support a buy or sell decision that's already been made. This is called a 'confirmation bias', where a certain technical signal may be acted on if it jives with the opinion, but the same chart signal will be ignored if it conflicts with a trader's desires. That's a mistake.
Another example of poor application of charting signals to plenty stock trading (and along the same lines) is acting on a technical analysis signal for a chart where that particular signal has never worked before. Why would it work now?
Point being, technical analysis probably won't work if it's not analysis, not applied consistently, and only used to support what you want it to.
What do you expect to achieve by applying technical analysis to this penny stock?
Technical analysis isn't unpopular because it's bad. It's unpopular because most traders apply it without fully understanding its limitations and advantages, and are then disappointed in the results.
It's not foolproof.
Here's the thing.... conventional fundamental analysis isn't foolproof either - there are plenty of stocks that should have gone higher (everything ranging from micro caps top mega caps) based on their value, yet still went lower.
Both technical analysis and fundamental analysis are odds tool, and when applied intelligently and consistently, improve a traders odds. One, or even several, failures of these tools doesn't make them useless, whether you're talking about penny stocks or the largest of the large companies. Technical analysis is just an 'edge' that can improve your success rate by (generally) 25% to 50%.... which is a lot in this business.
Is the penny stock in question a worthy charting analysis candidate?
Contrary to popular belief, it's not the low-price nature of penny stocks that makes them bad candidates for the application of technical analysis - it's the lack of liquidity that applies to most of them.
If the volume is inconsistent, and/or only a few thousand shares per day, odds are good that news and an ebb and flow in interest are going to push that stock all over the place, making any technical analysis pointless simply because there's no flow, pattern, or trend that can develop... all of which are crucial to technical analysis.
Generally speaking, a penny stock should boast an average volume of 75,000 shares or more per day to be considered liquid enough to put under a charting analysis microscope. It's not a hard and fast rule, but just a rule of thumb, with exceptions. Consistent volume is almost as important as absolute average volume though.
Bottom Line: Use technical analysis, or not, when trading penny stocks?
If all three considerations above have been made and the chart in question has passed the litmus test, then yes, charting tools can be well applied to penny stocks.