American Resources (AREC) Stocks Flashes a 69% Probability Rebound Signal

Penny stocks are wildly chaotic and are hardly appropriate to speculate on with money you can’t afford to lose. That said, if you’re going to try to predict the movement of potentially promising ideas in this space, a quantitative approach based on discretized datasets is arguably the most effective.

Let’s take a look at American Resources (NASDAQ:AREC) as a prime example. Headquartered in Fishers, Indiana, American Resources is a raw materials solutions provider, focusing on the supply chains feeding rare earth magnets, lithium-ion batteries and semiconductor elements. Fundamentally, the enterprise commands strong relevancies for the defense and various commercial sectors.

At the same time, we’re talking about a security that carries a price tag of less than a buck. Further, AREC stock is wildly choppy. In the past week, the security managed to gain over 3% of value. On the flipside, since the beginning of this year, AREC is down more than 26%.

It’s at this point that, if any financial publication firm were to cover American Resources, a discussion on the financial metrics and broader sector performance would commence. However, such narratives are less meaningful, especially with penny stocks.

The truth of the matter is, most companies in this speculative arena feature shoddy financials. As for approaching names like AREC stock from the lens of technical analysis, this too is problematic. Price is a continuous scalar signal and can dramatically fluctuate across vast stretches of time. Unfortunately, the principle of non-stationarity —that is, the jumping, collapsing, reverse-splitting and diluting — of penny stocks create utter chaos for market participants.

There is a better approach and that is to deploy discretization.

Discrete-Event Analysis Points to a Compelling Picture for AREC Stock

Although it’s tempting to focus on price when it comes to “cheap” penny stocks, the reality is that price itself doesn’t carry a first-order principle. Stated differently, there’s no reason why AREC stock priced at 75 cents per share would mean anything that is the point where demand was actualized.

Subsequently, it’s the demand structure or market breadth that penny stock speculators should zero in on. By assessing the sequence of accumulation and distribution, you can categorize and quantify discrete, binary events across vast stretches of time.

At first glance, the concept of discrete-event analysis sounds overly complex but it’s actually quite intuitive. Using statistical tools to analyze price is spurious because price generally changes over a long period of time. A $100 stock today could have been worth $10 a decade ago. Conducting statistical clustering for such a wide delta is pointless.

However, demand structures are binary — demand is either happening or it’s not. As such, these patterns can be studied across multiple years, even decades, to assess forward probabilities.

Primarily, the reason why AREC stock stands out is that, during the past two months, the security printed a 4-6-U sequence: four up weeks, six down weeks, with a net positive trajectory across the 10-week period. In 69.23% of cases, the following week’s price action resulted in upside, with a median return of 4.37%

What makes this setup so attractive is that, as a baseline, the chance that AREC stock will rise over any given week is only 43.56%. Essentially, the 4-6-U offers nearly 26 percentage points of free odds for the speculator.

Because we’re talking about penny stocks, it’s going to be difficult to give a forward price range. That said, over the next few weeks, the bulls may attempt to drive AREC stock to between 80 cents to 95 cents.