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How to Choose the WinnersUnderstanding Penny Stocks

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Leeds Analysis VII - Technicals

Permanent Spike

When a fundamental factor drives the spike and it takes place over a longer time frame, (and usually in a less dramatic fashion than the temporary spike), it could be a permanent spike. While there have been many cases where a permanent spike sent a stock 50% or 100% higher in only one day, the reason is usually very obvious (ie- increased earnings announcement, landing a major contract that will be accretive to future earnings, etc...).

When the cause is not so obvious, you will usually see the spike form over the course of a week or so. This may just represent an increase in valuation by investors, and may not be based on anything tangible or obvious.

Support Levels

Some penny stocks enjoy support levels, which are prices that the shares do not fall below, due to buying pressure.

Often with penny stocks the support level will form at a marker price, like $1.00 or $1.50 (as oppossed to $1.12, or $0.83). This is because many people tell their brokers to 'buy at $1.00,' simply because it is a nice round number.

As well, a support level can be created when a company doing a share buy-back decides that they will acquire their stock at that price. Their buy positions are usually large enough to ensure that their thinly traded stock will not fall below that price.

If this is the case, traders getting in just above the support level (ie- $1.05 in this example of $1.00 support) are facing limited downside risk, while acquiring all the upside potential inherent in the stock.

Often there is a corresponding volume increase whenever shares approach the support. Remember that support levels may increase the chances that a stock remains above the threshold price, but no support level is immune from potentially failing.

Also, it is possible for several support levels to exist for one stock. A penny stock may have moderate support at one price, then even greater support at a lower price, and very strong support at a third.

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