Trading Penny Stocks: How Mad Money is Made

I guess this is somewhat of an “I told you so” moment. Anyone who has been following this penny stock trading blog for any length of time will be familiar with our “case study” of sorts, the AMEX stock known as Palatin Technologies (ticker: PTN). I had first highlighted the stock at the beginning of July when I did a post about what to look for when you buy penny stocks. From there, I used PTN as an example (in another post) of how to recognize support and resistance levels, and how to interpret them in light of price action. As many of you who have been following this blog can attest, when PTN dropped to a low of $0.11 a share in mid-August, I began to draw attention to it in my post on August 20th (the support and resistance post), and I said that the chart was basically “building a case” for a breakout above $0.15 a share. Well, today that breakout took place in grand fashion…I’ll leave it up to you to examine the “proof in the pudding”—here’s the most recent 3-month daily chart:


Today PTN closed at $0.27, while hitting an intra-day high of $0.34—that’s THREE times its lowest support level of $0.11 per share. Notice that last huge vertical bar on the far right—that’s the price action from today’s trading session. Notice also the huge spike in volume--over a million shares--no doubt a bunch of buy stop orders were triggered once the $0.15 threshold was violated. As I mentioned above, it hit a high of $0.34, which is almost half of its 52-week high of $0.70. I had been waiting and waiting to be able to show you guys a real-life, real-time example of how to interpret price action in penny stocks using charts, and thank God I was able to find one that would end up being a perfect case study for what I’ve been saying. When I first logged into my trading account and checked PTN’s price today, I just laughed to myself, and Ted Warren’s words were just ringing in my ears—“There’s no greater proof that a stock will rise than when it acts as if it can’t.” I’m telling you, studying this chart will give you a clinic on all the different psychological acrobatics the insiders will use to discourage the public out of a stock, and make them willing to dump their shares at a loss (and at the worst possible moment). A look at the 1-year daily chart will lend more perspective to what I’m saying:


Here we see several “shakeouts” designed to discourage the public, and to wear them down enough to convince them that the stock is dead and cannot be revived. The steep break below $0.20 per share in mid-May was definitely one of the “red flags” the insiders designed to get unwary investors nervous about staying in the stock—this sudden, “out-of-character” dip in price was almost like the tremor before the big earthquake. But then, a false support level right at $0.20 was created in the following days (and weeks) through mid-June to give unwary speculators a false sense of “Hey, this is as far as the stock can fall.” Unfortunately for them, the insiders basically ripped the rug right out from under them and began to navigate a gradual decline in price down to the sub-$0.15 a share level. All of a sudden, in what seemed like the blink of an eye, $0.15 was now the resistance level instead of support, and $0.11 became the new support level. Once I saw the accumulation begin to form inside of the $0.11-to-$0.15 range, with a very obvious resistance level of $0.15, I knew that a breakout was imminent, I just didn’t know when—again, that’s the “waiting game” that you have to learn to play when trading penny stocks. Once the stock’s price broke AND CLOSED (that’s important) above that month-long resistance level of $0.15 yesterday (9/3), I knew that it was on like Donkey Kong. And sure enough, those who were able to get into PTN anywhere within that $0.11-to-$0.15 range quickly doubled (and possibly tripled) their money within a matter of days. That’s the tricky part about trading penny stocks…the real money-making price moves take weeks and sometimes months to ripen, but the actual breakouts can be so sudden and violent that they are often over within a day, or a couple of days. The best way to approach this is to make sure that you’re at an entry point where you believe you can set a good exit order and lock in some profit. When I see a chart like this, I know that if I pick my entry point right, I can almost guarantee that I’m going to make at least 40% to 50% on my money, so I’ll go ahead right after I get into the stock and set a limit order to sell the stock for whatever price level will lock in that 50% profit. More often than not, this works, and the limit order will be triggered once the prices make the inevitable spike on a breakout above a well-established resistance level. This is a very conservative play, but it’s more “hands-off” than actually watching the markets throughout the day to see if you can catch the quick move and submit an order to close your position fast enough to where you won’t miss it.

To avoid writing a complete novel on this subject, I’ll cut this off for now, but again, I’m glad that I could finally share a real-time example of a penny stock taking off based on positive price action. It’s really simple when you boil it down to its essential elements; trading penny stocks is really just an exercise in understanding support and resistance, and how to capitalize on the inevitable price spikes that come when resistance is violated. Until we blog again…