This High Risk / High Reward Stock Looks Poised for a Breakout

We recently started a series called “Penny Stock of the Day”. These ideas are geared towards traders with an extremely high risk appetite.

Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.

Penny Stock of the Day: Canaan Inc. (NASDAQ: CAN)

Today’s penny stock pick is the computer hardware manufacturer, Canaan Inc. (NASDAQ: CAN).

Canaan Inc. engages in the research, design, and sale of integrated circuit (IC) final mining equipment products by integrating IC products for bitcoin mining and related components primarily in the People’s Republic of China. It is also involved in the assembly and distribution of mining equipment and spare parts. The company has a strategic cooperation with Northern Data AG in the areas of artificial intelligence development, blockchain technology, and datacenter operations.

Website:  www.canaan-creative.com

Latest 10-k report:  https://sec.report/Document/0001193125-22-133564/

Analyst Consensus: As per TipRanks Analytics, based on 1 Wall Street analyst offering 12-month price targets for CAN in the last 3 months, the stock has an average price target of $10.00, which is nearly 186% upside from current levels.

Potential Catalysts / Reasons for the Hype:

• The company delivered better-than-expected Q1 results.
• Hedge Funds Increased Holdings by 98.4K Shares Last Quarter.
  

  Hedge Fund | Source: TipRanks.com

On analyzing the company’s stock charts, there seem to be multiple bullish indications…

Bullish Indications

#1 Falling Wedge Pattern: The daily chart shows that the stock has been forming a falling wedge pattern for the past several months. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock currently looks poised for a breakout from the falling wedge pattern. Once the stock breaks out of the falling wedge pattern, it could move higher.

#2 Bullish RSI: The RSI is nearing 50 and moving higher, indicating possible bullishness.

#3 Bullish Stoch:  The %K line of the stochastic is above the %D line, and has also moved higher from oversold levels, indicating possible bullishness.

#4 MACD above Signal Line: In the daily chart, the MACD (light blue color) is currently above the MACD signal line (orange color). This indicates a possible bullish setup.

#5 Above Support Area: The weekly chart shows that the stock is currently trading above a support area, which is marked as an orange color dotted line. This is a possible bullish indication.

#6 Bullish Stoch: The %K line is above the %D line of the stochastic in the weekly chart as well, indicating possible bullishness.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for CAN is above the price of $3.55.

Target Prices: Our first target is $4.50. If it closes above that level, the second target price is $5.70.

Stop Loss: To limit risk, place a stop loss at $3.00. Note that the stop loss is on a closing basis.

Our target potential upside is 27% to 61%.

For a risk of $0.55, our first target reward is $0.95, and the second target reward is $2.15. This is a nearly 1:2 and 1:4 risk-reward trade.

In other words, this trade offers 2x to 4x more potential upside than downside.

Potential Risks / Red Flags:

1. The company has a history of net losses. CAN incurred a net loss from operations in the amount of RMB1,034.5 million, and RMB215.1 million in 2019, and 2020, respectively.
   

   CAN – Consolidated Statements of Operations and Net Loss

2. The company’s ADSs may be delisted under the Holding Foreign Companies Accountable Act if the Public Company Accounting Oversight Board (PCAOB) is unable to inspect auditors who are located in China. This could materially and adversely affect the value of the stockholder’s investment.
3. The company has multiple legal proceedings
   1. On March 4, 2020, a putative class action was filed in the United States District Court of Oregon against CAN, certain of its officers and directors, and the underwriters in our IPO. The complaint alleges that CAN’s registration statement on Form F-1, initially filed with the Securities and Exchange Commission on October 28, 2019 (File No. 333-234356), contained material misstatements and omissions in violation of federal securities laws.
   2. On March 6, 2020, another putative class action, making substantially similar allegations, was filed in New York County Supreme Court against CAN and certain of its officers and directors.
   3. On April 15, 2021, a new putative class action was filed in the U.S. District Court for the Southern District of New York against CAN and certain of its officers and directors. The complaint alleges that the company’s statements in February 2021 about increased visibility into revenue and the size and quality of orders we were receiving were materially false and misleading.
4. In 2021, the company and its subsidiaries paid an aggregate of RMB5.6 million (US$0.9 million) in cash to its directors and executive officers as a group.

As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!

Happy Trading!

— Trades of the Day Research Team

READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.

Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.