Penny Stock Trading: Understanding Support and Resistance

Sorry for the mini-hiatus...I've been busy with a lot of personal matters, although I haven't stopped trading penny stocks to any degree. Good thing it doesn't take much to trade penny stocks, once you decide on your plan and then enter your position. That's the cool thing about trading in general is the personal freedom it affords; what other business or money making venture offers this much flexibility? You simply assess a price chart, make a sound decision, and then place your trade, and then wait for the market to (hopefully) do what you were thinking it was going to do.

Let me make it clear, though...the market is always going to do what it's going to do, and unless you have decided to move with it and not against it, you'll be another victim of the "whipsaw effect", and you will see your emotions getting the best of you, as well as seeing your money swirling down the drain. The markets are a serious drain on the emotional trader's account--take it from a guy who has first-hand knowledge. It's amazing how many tricks your mind can play on you when you allow fear and/or greed to take over. The true trader removes his/her ego and emotions from the trade; this is one of the hallmarks of successful trading; when you can watch your account lose 20% in minutes, and your heart doesn't even skip a beat. It takes confidence and maybe even a little "ignorant bliss" to trade without pulling your hair out. If you have confidence that you bought right, meaning you recognized a good chart pattern, planned your entry (and exit) based on well-established points of support and resistance (which we'll get into in this post), then you have nothing left to do but place the trade and let 'er rip.

Now, on to support and resistance...what do I mean by this stuff? First, you have to be a chartist for these terms to even apply. Support and resistance are definitely two of the cornerstones of technical analysis using price charts. So what are they? Basically, support and resistance are the "floor and ceiling" of a stock's price range. Have you ever seen a stock chart where the price of the stock just seemed to bounce around within a given range, and although it would hit some highs and some lows, it never could seem to break below the "floor" of a certain price, or above the "ceiling" of another price? This is what's known as support and resistance. Let's say that you're observing a stock's price chart, and you notice that this particular stock's price seems to trade between $0.15 and $0.35 a share, bouncing around within that price range. Then, there are weeks where the price repeatedly travels down to $0.15 a share and bounces right back up, and then down to $0.15 again, but it never can seem to break below that $0.15 level. You can rightly assume that $0.15 is the support level for this stock. Then, you're hopeful that the price will someday break out above that "invisible ceiling" of $0.35, and the prices may indeed bang up against that price level several times, but they just can't seem to rise any higher than that $0.35 level. You can rightfully draw the conclusion that $0.35 is the resistance level for this stock, because it seems as though the stock's price is "resisting" the thought of going any higher.

One of my absolute favoritest (is that a word?) quotes from Ted Warren's classic stock trading book, "How to Make the Stock Market Make Money for You", is the following quote:

"There's no greater proof that a stock is going to rise than when it acts as if it can't."

This can be seen in a great way by studying the support and resistance levels of any given stock's price chart. When a stock's price is just "trudging along", and seemingly not making any progress, but staying within a definite trading range defined by well-established support and resistance levels, rest assured that you're in the "calm before the storm". A lot of times the support and resistance points on a price chart are psychological price levels that the public is "used to" identifying the stock by. Once those levels are violated by extreme moves in either direction, you better believe that the price will travel farther in that same direction, be it up or down. What do I mean? Let's say that a penny stock has forever-and-a-day traded below $3.00 a share. The price may have banged up against that $3.00 resistance for years and years, and now there's a "flicker" of a move evidenced by a sudden break above $3.00 a share--let's say $3.20. Even if the stock's price quickly retreats back under that $3.00 level from there, rest assured, that $3.20 price will be revisited--and it will more often than not travel FAR above that resistance level...again, the strength of the move will be mainly determined by how long it's been "percolating" in that relatively tight trading range. The whole principle is based on one of those famous laws of physics which says "Objects in motion tend to stay in motion". Once the price breaks out of that support/resistance level, it will tend to keep moving in that direction, be it up or down.

Okay, I hope I have not bored anyone to tears with such a long post about penny stock trading using the basic principles of support and resistance. Go forth and kick butt!!!