How Not to Get Spooked By Penny Stock Charts

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How Not to Get Spooked By Penny Stock Charts By Greg Guenthner November 1, 2010 For traders, stock charts can give a wealth of knowledge about how a stock is trading. They can tell you if a rally could ensue or if it`s time to unload your shares. Follow this advice to avoid finding false positives in your buy and sell signals Charting isn`t some bizarre cult that works off magic and hope. It`s actually the opposite. It works because human nature is predictable.

People investing in stocks will follow predictable trading patterns more often than not. If you learn to find these areas in charts that will coax investors to buy or sell, you can make money by trading stocks. It`s that simple.

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However, many traders get the basic principles of support and resistance totally wrong. It`s critical to view support and resistance levels as flexible zones, rather than unbreakable points that always trigger a big move. In fact, if you see a stock break below short-term resistance intraday, you could be getting clues as to how strong the buyers really are.

http://pennysleuth.com/files/2010/11/110110Sleuth.png Here we have a stock that had traded in a narrow range for many weeks. If you owned shares while the stock was trading in this channel, you might have been tempted to sell when it broke support during the trading day.

But notice how every time it dropped below support, strong buying pushed it back before the end of the day. This is a great indication that investors aren`t willing to part with their shares at lower levels and that buyers are willing to pay the higher prices to add to their positions. Also take note that the volume was strong as the stock rallied back to its channel.

In these situations, it`s best to wait for the market to close before deciding that it might be time to part with your shares. Fake outs like these happen all the time, both at support and resistance. Without volume confirmation and some follow-through, the move might not be the real deal If you had been spooked out of your shares on one of the days when the stock briefly dropped below support, you would have missed the powerful rally just a couple of weeks later when the stock convincingly broke resistance on heavy relative volume.

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