When Chad asked me to write a post for his blog, I wasn’t sure that I would have much to say that might interest his target audience. Not being a frequent (or at all knowledgeable) investor, I was not sure how I could shed some light on the topic of finance for a group of people that already knows more than I. That is, not until I looked at the bigger picture. We are at the one year anniversary of when Hurricane Katrina struck our country. The impact of this event is so significant that it has touched us all in some way shape or form, and unfortunately much of the context in which this event occurred revolves around simple dollars and cents – the very topic of this blog.

I say that Katrina struck our country instead of New Orleans specifically, because in truth while the hurricane’s initial geographic location was NOLA, its effects have reached every state, city and person in the nation. From the impact on friends and family to the new neighbors that may have fled to your town to the money that has been (and still needs to be) spent on rebuilding, each person is aware of the situation and has been impacted – even if they weren’t residents of the “Big Easy” a year ago.

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I personally prefer not to trade penny stocks for a couple reasons. First, my stomach does not handle that type of volatility very well. Second, these stocks are much easier to manipulate maliciously than higher priced stocks. Here is the most recent example of my point in an article written by Tyler Hamilton titled "Spammers Make a Sound Investment in Stocks - Unsolicited e-mail that touts penny stocks is on the rise and getting results".

A new study reveals that spam messages promoting stocks can make you money -- if you're the spammer.

"Hot Energy! Oil Stock!" shouts the typical message. "Ready To Run!! Big Winner!!! Huge Advertising Campaign This Week!" Such come-on messages often refer to a company with a listing on the Pink Sheets, an over-the-counter stock quotation system. They're designed to entice novice traders to buy stocks that are normally overlooked.

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Let me introduce you to the classic Adam & Adam Double Top (AADT). The hardest part of this pattern is finding and correctly identifying them. Amateurs too often confused (mis-read) this pattern because they do not pay enough attention to the identification guidelines. Amateurs often times will mistake the top of an ascending triangle as a double top and its not until the stock breaks upward (and they lose money) that the truth is revealed to them.

They primary key to this pattern is the twin Adam peaks must look similar to each other. Two well-defined peaks that are narrow and pointed (Adam peaks) whose price are very close to one another. This should not be confused with two peaks where one is rounded or wider in any way thus forming an Eve peak and should be traded differently. This downward breaking pattern requires two price spikes touching near the same price and sporting heavy volume near the two peaks. The volume pattern should form a U-shape between the peaks, with volume usually being heavier on the left peak.

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j2 Global Communications provides a variety of business-critical communications and messaging services through its global communications/telephony/messaging network. This sector (Services/Communications Services: SCS) has seen a steady flow of institutional money and this has been reflected in the nice run up in the JCOM stock that began in the beginning of July 2005. Solid company fundaments and a sector leader also prove to be attractive here.

This morning JCOM opened nearly 1.5% lower to 23.14. This is just above the support level outlined below and what I like to refer to as an "injection point". The injection point is the point where the stock price touches a critical support level. A stop loss is placed immediately and directly under this injection point because of the enormous selling pressure it would be needed to move the stock another percent or two lower. This of course creates a low risk (high reward) entry point, aka an injection point.

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I recently read an article by Mr. Phillip Wood discussing Risk/Reward Ratio's and how trading this strategy can help increase your profits. Mr. Woods states:

If you are risking more in a trade than you stand to make in profits, you are setting yourself up for failure. Imagine you are interested in buying a lottery ticket for a jackpot worth $1 million. So you drive over to the convenience store to buy a ticket, but the price of one ticket is $2 million. You can’t believe your eyes. Who in their right mind would pay $2 million for the chance to win $1 million? In disgust, you turn around and promptly storm out of the convenience store. Unfortunately, however, there are a lot of traders who buy the $2 million ticket on a regular basis. They do so by risking more in a trade than they stand to make in profits. They risk $2 to make $1.

While I agree with most of the article and practice this strategy, there is one major difference between Mr. Wood and myself when it comes to determining an appropriate Risk/Reward ratio. That difference is that my reward is constantly changing, either for the good or bad, based on what the stock and all the other technical indicators are telling me. My pre-defined target price can change at any time.

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The pennant pattern is fun to trade, easy to identify and one that I often look for to make quick money. Pennant trades are for short-term (swing) traders, not for buy-and-hold investors. There are four main identification guidelines when it comes to pennants. Here they are:

1.) Price is bounded by an upper and lower trend line. The price here usually goes against the trend: The price will rise in a downtrend and fall in an uptrend.

2.) Three-week Maximum. Pennants are short term patterns and thus should not last more than 3 weeks. Even three weeks is really pushing it. I prefer pennants to last only seven to eleven days. Longer than 3 weeks and the pattern turns into a symmetrical triangle or wedge.

3.) Steep, quick price trend. Pennants should have a very steep price move (up or down) leading into the pattern.

4.) Downward volume trend. Volume will usually trend downward until the break out move occurs.

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Recently, my friends over at Wall Street Warrior brought an interesting trade to my attention. The company is Lam Research Corporation (LRCX), founded in 1980. Lam is a major supplier of wafer fabrication equipment and services to the world's semiconductor industry. This industry has not seen a tremendous amount of institutional cash flow recently. Couple that with a bearish market and a double whammy technical setup and you could find yourself in the middle of a good shorting opportunity.

The two bearish technical patterns here include a head-and-shoulders and bearish flag. The recent breach of the critical 200Day SMA support confirms the bearish reversal taking place here. A recent pullback on very weak and declining volume sets up a low risk entry point for a short trade here.

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