Trading Penny Stocks: Understanding Price Action

As often happens when you trade penny stocks, especially if you are a chartist (meaning you formulate your trading decisions based on the price activity of a stock as registered by its price chart), you do your homework, you study the price chart, you make your trading decision and decide on your entry point, you set your price objective or your exit strategy (and all of this should be done BEFORE you get into the trade), and then you “pull the trigger” and lay the money on the line, so to speak. Wow, what a run-on sentence that was. Anyway, you do all these things, having confidence that you have done your homework and not jumped into anything too rashly. Then, once you’re in the position, you literally just have to wait. And I mean that’s really all you can do. The bottom line is that your decision has been made, you’re in the market now, and you really can’t force the market to do one single thing. You can log into your trading account every 20 minutes and check up on the price of the stock (as I used to do in my earlier trading days), hoping that some miraculous drastic price move will take your stock soaring into the stratosphere, but I’m here to tell you, 99% of the time, that just doesn’t happen. Most of the time the moves are gradual, with a bunch of sputters and staggers and ups and downs in between your entry price and your objective. The price never moves in a perfect straight line up or down. So, while you’re waiting, you will have to endure the general market ups and downs, and you’re going to have to come to grips with the emotional ups and downs that may accompany those price moves. My advice is to not look at the price at all during the trading day. Why? Because nothing is absolute until the closing bell. Sure, you could watch the price of the stock fluctuate during the trading day, and it may do all kinds of wonderful things, and if you’re the mack-daddy astute trader you could capitalize on an intra-day move and exit with a nice profit, but the volatility of the penny stock markets don’t lend to well to day trading, primarily due to the rapid price movements. You may find that your orders won’t get filled in a fast-moving market, especially if you’re using limit orders (which, in my opinion, limit orders are the only ones you should use). I know the temptation will be for you to try and use a market order just so you can get filled more quickly, but lemme tell you again, you will find your exit price being the low of the day if you’re long or the high of the day if you’re short. Speaking of going short, we’ll talk about what that even means in a later post. For the most part, the penny stocks that I normally focus on are priced so low, it wouldn’t do too much good to try and short them. There are benefits and then drawbacks of going short, but again, I’ll have to get to that in a later post; I want to focus (yeah, right) on understanding price action with this post, particularly with the stock I just highlighted (Palatin Technologies—Ticker: PTN).

Now…on to PTN. I had highlighted this stock right before the 4th of July holiday, and if memory serves me correctly, it was trading somewhere around $0.18 per share. Once the holiday passed by, the stock immediately dropped below $0.18, closing consecutively lower on a daily basis, and now as of Friday’s close, we’re sitting at $0.15. This was actually very funny to me, because I mentioned how I was all about this stock, and how I believed it was going to rise, but then the subsequent immediate drop in price seemed to totally contradict what I was saying. This is where you learn patience, and where you learn how the game is played. Let me expound on this a little bit…take a look at PTN’s 2-month daily chart, logging the past 60 days of trading activity:

Again, sorry for the blurry chart...I'm just not technically sophisticated enough to make the resolution much higher. You might want to look up the 2-month chart of PTN at BigCharts.com for better clarity. As you can see, PTN was rolling along for the majority of the month of June with extremely obvious support at $0.20. From the last week of May until the 24th of June, the price did not dip below $0.20 except for only two times, on June 16th and 17th. Even on those two days, it still closed above $0.20. Those two dates notwithstanding, the low of every single day was EXACTLY $0.20 per share, from May 23rd all the way to June 24th. I’m no statistician, but I don’t even know if that’s mathematically probable without some type of price manipulation. So it was very apparent that $0.20 was a price that the public was “used to” seeing PTN stay above, and a price that someone wanted the stock to be “known for” staying above, so to speak. Then, all of a sudden, the last week of June hits, and the stock’s price takes a turn for the worse (if you were long, anyway), closing below $0.20, and subsequently lower after that, to where we are now as of Friday’s close, which was $0.15. This is what’s so interesting: If you look at the volume for these trading days, you’ll see that the amount of shares traded has been relatively low, even though this is the lowest PTN’s price has been in a solid year. There was more of a mass sell-off back in mid-May, when the price was significantly higher than now…more than a million shares were dumped on May 14th, even though that wasn’t the lowest that PTN was gonna go. Now, PTN is at its absolute lowest it’s ever been at $0.15, yet the volume hasn’t even cracked 500,000 shares in any recent trading day. I believe that this is almost proof positive of some type of price manipulation going on behind the scenes. The insiders are quietly snapping up shares and guiding the price lower, gradually scaling it down to discourage the public from jumping in at what I believe to be a very obvious bargain price, so that they can have a good inventory of stock to sell to the public when the time is right. I will continue to stand by my initial suspicions, even though the price may still move lower for the time being.

This is why I posted earlier about having patience while trading penny stocks because you never fully know what time the stock will be “ripe for the picking”, but you have to have the patience to stick it out without letting the price action discourage you. Keep your eyes on PTN…it’s just one of the many stocks you’ll come across that have the right type of price action to look for when you’re buying penny stocks.