Determining What Penny Stocks to Invest In

Well folks, I now have another “I told you so” moment to highlight for you…not trying to toot my own horn, but it does feel good to be back on the right side of the market after what seemed like a “dry spell” in my penny stock trading. As some of you know, those of you who have checked out some of my past posts, I have had some out-of-the-park home runs, and a couple of embarrassing stock picks that turned out to be total flops. I can now officially say that I have been trading penny stocks for a decade—it’s simply unreal how fast time has flown by. My hope is that someone reading this blog and wondering what penny stocks to invest in will have a better road map than I had when I started. I strongly encourage anyone who’s curious about making money with penny stocks to go back through my post archives and focus on what I’ve written about trading penny stocks using charts, understanding price action, and knowing what to look for when selecting penny stocks. Thank God I now have a very recent example of how vital it is to understand price action and also how to apply patience in these markets—remember the old adage, pigs ALWAYS get slaughtered in the market, so you have to learn how to be patient. I say that in light of a recent up-move in a stock that I had put on my watch list and talked about in my post about oil penny stocks back in November of last year—a particular company named Evolution Petroleum Corp (ASE: EPM). I explained how I have been paying a lot more attention to opportunities in the realm of stocks that are trading at prices between $5.00 and $10.00 per share. While this is not the normal thought I have in mind when I think “penny stocks”—usually I’m dealing with stocks at or below a dollar per share—I have opened my mind a lot lately to the higher-priced shares when I believe that the percentage move will be solid. That’s all that really matters anyway, is the percentage move of the stock. If a blue chip stock makes a run up from $55.00 per share to $110.00 per share (a 100% move), it’s no different than a penny stock trading at $0.10 per share moving up to $0.20 per share (still a 100% move).

So lately I’ve been finding that these stocks priced in the $5.00 - $10.00 per share price range have tons of opportunities and some very solid price action. That’s what stood out to me back in November of last year when I wrote about Evolution Petroleum—the price action was extremely solid, and the stock was range trading within a $2.00 window for a number of months. This is EXACTLY the kind of price action you want to look for when you’re choosing penny stocks for potential breakouts—look for the ones with the boring but consistent price action and quiet volume, the really non-descript kind of stocks that display steady price action. I can’t emphasize that enough. Anyway, back when I posted about EPM in November 2011, it was trading at $7.16 per share. I mentioned in that post that if we saw a convincing punch above the $8.50 level, it would more than likely be off to the races for EPM. Folks, that is exactly what happened at the beginning of this year. Check out the chart:

Image courtesy of BigCharts.com

The first crack above $8.50 happened on December 7th, 2011 when the stock opened above that magical $8.50 barrier at $8.68. Once that took place, for the rest of the trading days in December and into mid-January there was some obvious “congestion” around that $8.50 level. The market was basically “wrestling” with this new price, but the longs eventually prevailed when the $9.00 resistance level was shattered on January 20th, 2012. From that point, it has been a new level of price discovery going on for EPM, and as of this writing, it’s trading at $9.30 (I’m writing this during trading hours on 2/14/12). I don’t know how many more times I can say it…this is a very simple business folks. It’s also a recession-proof business. There are ALWAYS opportunities to multiply your money in the penny stock markets, but you do need some patience and a basic strategy. A price move from $7.16 (when I first discussed EPM) to $9.30 (its current price) is roughly a 30% move up—an enviable return in pretty much any market. I don’t think that EPM is finished, either…there will more than likely be some overhead resistance it will run into in the short run, but this uptrend is pretty solid at the moment. As with all price moves, eventually this will be over, but if you learn how to identify what penny stocks to invest in by looking for that range trade price action, that sideways channel of boring price action, quiet volume, and if you are willing to be PATIENT, you can have a much higher likelihood of coming away from your trades with profits instead of losses. I’ll be doing some more research on this category of $5.00 - $10.00 per share stocks, so be on the lookout for some more potential penny stock trading ideas in the near future.