A penny stock breakout happens when a micro cap stock moves above a resistance level on volume that is heavier than normal. Many professional investors generally buy mid to large cap stocks based on this technical aspect, because of momentum and the theory that the stock is now being owned by stronger hands.
However, many of these institutional types stay away from even the most text book penny stock breakout, due to the lack of liquidity in some of these names. Does that mean you should do the same on a retail basis ? Absolutely not. Keep in mind that most retail investors don’t impact a stocks’ liquidity because they are usually investing between $1k and $20k in an idea. Even if it’s the hottest penny stock. On an institutional basis, trades of $200k wont even come close to making a dent in the funds’ returns even if the name turns into a massive gain. This is just another reason that many hedge funds just stay away.
Although, when you check out a potential penny stock breakout from a retail standpoint, even the most skeptical chart technician has to admit that a chart is a chart, and in theory, stocks often see follow through when the set new highs or break resistance on substantial volume.
Penny Stock Breakouts
For instance, we highlighted Jammin Java (JAMB:OB) and Lithium Exploration Group (LEXG:OB)extremely early in their breakout phases as they were setting news highs. Basically, before the herd came in at the end right before both stocks pulled back sharply. Keep in mind that their are retail investors who make a living trading zombie stocks like Washington Mutual (WAMUQ.PK) and Lehman Brothers (LEHMQ.PK) based on the penny stock breakout process.
Now here is the hard part, you have to learn how to read charts and it does take time to get comfortable with this style of trading because many of these potentially hot stocks do briefly pull back after setting new highs. And sometimes, even seasoned investors can get shaken out of a mild downturn.
So if you decide that this style is for you check back or subscribe. Just remember that heavy volume is the key sign during these moves, and always keep your losses small. A penny stock breakout happens almost everyday and you want to be solvent enough to play the next opportunity.
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