Penny Stock Trading: Support and Resistance Levels

You never quite know what kind of ride you’re going to be taken on when you’re trading penny stocks, but one thing is for sure…it will be a revealing experience no matter what. What I mean by this is that your own character and emotional makeup will be revealed to you by means of your reactions to the market’s “acrobatics” at times. Even though the penny stock markets are overwhelmingly touted as the “get rich quick” arena of stock trading, the same principles apply to this area of investing as they do to the more traditional types of investments…patience, being conservative, and applying proper money management. But I digress. There just seems to be an awful lot of hype surrounding penny stocks which may not fully be warranted, especially when you trade them day in and day out, and see the actual lifespan of a chart formation, or the actual duration of a decent trade. In short, penny stock trading is a marathon, not a sprint, although I wouldn’t mind accomplishing a profitable trade at Usain Bolt-like speed! More often than not, however, you will have to adjust your temperament to account for the market’s idiosyncrasies, many of which can drive you up a doggone wall sometimes. It’s funny how the market most of the time reacts differently than how we think it should, or in the time frames that we think are “reasonable”. The market does what it does, when it does, and the best you can do is buckle down and become a student of chart reading so that you can begin to tell when these market moves have a high likelihood of happening, based on solid price action.

But before I get too far off on a tangent, I wanted to focus on support and resistance levels, and there’s no better example that I could use right now than our darling, Palatin Technologies (PTN), to explain this. As you recall from my past post about support and resistance, they are basically the floor and ceiling of a stock’s price. They define what’s known as the “trading range” for a given stock. Support is the lowest price that a stock will hit before rebounding, and what makes it support is the fact that prices just can’t seem to go any lower, as if they’re being “supported” (hence the name) by an invisible floor. Resistance is the “glass ceiling” that prices just can’t seem to break through; it’s like a fly banging against a window…he can’t figure out why he can’t go any further when he sees the great outdoors right in front of him, but there’s simply a restraining force keeping him from breaking out. This is resistance…it’s the invisible “cap” on a stock’s price, where it just can’t seem to rise any higher than this one particular price level, though several attempts have been made. Again, going back to our guinea pig stock, PTN, you can see this principle in action several times. Take a look at PTN’s 3-month daily chart:


As you can see, there was a strong support at $0.20 for a good while, for about a solid month from the end of May to the end of June. But then, prices took a dive in late June and the $0.20 price level took on a whole new role—it was now the resistance level instead of the support level. When you study enough charts, you will see this type of thing happen over and over again. Once a price that used to be support becomes resistance, it creates a serious psychological “barrier” in traders’ minds that’s very difficult to break through. So then, PTN’s price starts fluctuating and doing funny things. The daily trading ranges get larger--as much as a four-cent trading range on some days, which are actually huge price swings in a stock priced so low per share. So then, PTN continues its nose dive until it hits a solid floor at $0.15. As soon as it hit $0.15, it closed at or above $0.15 for five straight trading days before “falling apart” again and declining even lower. Now, we see the same action happening that took place at the $0.20 level—now, $0.15 has become resistance when it used to be support. Since the first trading day where PTN closed below $0.15, it hasn’t seen a close above $0.15 since. All we see is prices sometimes hitting their high at $0.15, but no price action daring to close above $0.15. This has been going on for a solid month now.

The chart is basically “building a case” for a breakout above 0.15 per share. This is some exciting stuff. Let me go ahead and tell you…we may have to sit a little while before we see PTN take off. This is the only agonizing aspect of penny stock trading…you simply cannot control when the prices will take off; you just do your best to position yourself properly in the market so that you’re there when they do take off. Nothing sucks worse than having had an opportunity to enter a trade at a prime price point, and not do it, and then see the stock take off like a runaway train. This happened to me with AFT, and let me tell you, it wasn’t the first time, and it won’t be the last. This, again, is another aspect of trading penny stocks that you just have to come to terms with…it’s simply part of the game. But back to PTN…the reason why I say that we may have to wait a while before we see it do anything significant is simply because the chart formation is not mature enough yet to justify a strong move up. There has to be a lot more “base building”, or foundation building, to happen before the price is ready to advance by any significant degree. Will we see yet another breakdown in price, where the support at $0.11-ish becomes resistance? Who knows…I just say watch the volume very carefully…you can see some serious quiet action going on, with not a whole lot of shares being traded daily right now. The insiders sure are patient. I believe that now is an even better time to hop on board the PTN train, but I will not officially label that a “recommendation”—you have to be convinced in your own mind. One thing I will say is that you never really can be 100% accurate with these things…you have to be like the weather man: spot the trends, make a calculated guess, and then wait to see if it works out, or if it makes you look like a fool. The market will have the final say-so. At any rate, if you ever wanted to see a good example of the psychology behind support and resistance levels, you’ve got it right here. Until next time...

Buying Penny Stocks: Are You a Investor or a Trader?

Are you a trader or an investor? This is an important question to ask (and answer) before you jump into the arena of buying penny stocks. On the surface they would appear to be the same thing, but the truth of the matter is, a trader is not always an investor, and an investor is not always a trader. Many people believe that if they buy a penny stock, they can call themselves an investor. This is not always true. If you want to get to the most pure definition of what an "investor" really is, it is not limited to just the stock market. An investor is someone who has the mindset of being able to take whatever is put in front of them, and make it bigger, better, and more profitable. This is true, whether you're working with a block of stock shares, or a piece of real estate, or even the debt portfolio of a large company. The one thing that an investor will have across the board, regardless of what particular area he/she chooses to focus on, is the ability to spot opportunities and capitalize on those opportunities. This holds especially true in the arena of penny stock trading, although as a general rule, the investor has a more long-term view in mind than a trader does. With trading, by virtue of the very nature of the word, it is simply a one-time transaction that hopefully produces a profit. With trading, you're not trying to commit to the company's management. You're not trying to figure out what the future of the company will look like. A trader could really care less about what products the company offers. Heck, a true technical trader (like myself) most of the time doesn't even know what the company DOES...he just looks at the chart, recognizes proper price action, and then buys the stock in hopes of later selling it for a profit. I guess you could say that an investor is a lot more emotionally and mentally invested in whatever he's putting his time, energy and money towards, while a trader just wants to get in and get out, as soon as possible, with as much profit as possible. I will have to admit, I belong to the latter category, and I'm not even sure that I'm ashamed of it.

As a good example of the quintessential investor would be Warren Buffet. Truckloads of books have been written about Buffet's investing style, and about why he is considered to be the "best investor in the world". To Buffet's credit, he obviously is doing something right, because he has a net worth in the billions of dollars. Nobody can argue with that. Would you call Buffet a trader? I say "No". See the difference? He doesn't "play the markets". He doesn't have a room with tons of monitors and trading screens, all giving him indicators and oscillators and regurgitators (okay, I made that one up), spouting out buy and sell signals...well, at least not to my knowledge. As a matter of fact, he's been hanging out in Omaha, far from the clutter and noise of Wall Street. One of my favorite quotes from Buffet is this: "Wall Street is the only place where people who drive Rolls-Royces take advice from people who ride the subway." So true. He maintains the investing philosophy of buying and holding for a looooonng time. As a matter of fact, he has been quoted as saying "Our favorite holding period is forever." In the world of investors, Buffet definitely stands head-and-shoulders above the rest. But, I think it would be a stretch to call him a trader. His "buy and hold forever" philosophy actually runs counter to how a trader thinks. The trader is concerned about how quick he can get his money back, with hopefully some extra on top of what he put in. The trader has one goal in mind: Spot the most profitable opportunity at the time, strike while the iron is hot, get in and out with the least amount of time in between as possible, and exit with a fat profit. Once you can master these actions, it's simply a lather, rinse, repeat type of deal. This definitely describes my penny stock trading style more than anything else.

Am I slamming the longer-term, Buffet-like investment approach? Absolutely not. As a matter of fact, part of the way Buffet thinks is actually a very necessary quality to have. Even though I want my trades to work out perfectly right off the bat--meaning, I want to get in and watch the stock immediately shoot to the moon--most of the time it doesn't happen like that. Patience is definitely required when trading penny stocks. You have to literally be willing, as Buffet implied, to wait "forever" if necessary to see the stock do what you're believing it's going to do. Now that doesn't mean that if the stock is tanking at record speed you just hang on forever (just ask anyone who had an Enron 401-K)...you do have to employ some reasonable money management skills with your trading capital. You definitely have to learn how to "cut your losses and let your winners run", as they say. But, if it's taking longer for that winner to run than you would like, don't make a stupid move out of impatience and just sell at a loss because it's "not happening fast enough". Be willing to see the chart formation through, and if the formation happens to crap out, then it's time to bail. I have had that happen many times. I have seen certain chart formations develop, that I thought were going to be money in the bank, and for whatever reason, they just crapped out, much to my disappointment (and hurting pockets). Hey, that's part of the game. I'm telling you, with every experience you gain something, even if it's not more money (LOL). You will spend a lot of time learning what NOT to do in the markets, I can tell you that. My suggestion is to be both an investor and a trader, and have the "quick step" of a Marty Schwartz, with the patience of a Warren Buffet. Put those two together, and you'll be buying penny stocks successfully.