How to Use Resistance Levels for Penny Stocks
When penny stock shares have a resistance level, they have difficulty trading above a specific price due to increasing selling pressure. Resistance is the opposite concept to support levels. For example, each time the shares approach $2.50, volume increases as shareholders sell their stock, and the price drops back from the $2.50 range under the weight of the selling.
Resistance levels are prone to form at round number and threshold prices, such as $2.00 and $1.50. Resistance levels are characterized by increasing trading volume at the resistance price and multiple failed attempts to break above that level.
Resistance keeps shares contained below a certain price and, as such, can be most effectively used to show investors where to sell. If the technical analysis (TA) pattern demonstrates that your specific penny stock faces a major resistance level at four dollars, you may want to take profits as the shares approach that level.
When a resistance level gets breached as the stock breaks through to higher prices, those shares very often power to much higher levels. It would have taken a major wave of investor buying to break through the resistance level and that buying may continue, and it may be based on materially positive events.
When resistance levels are breached, they very often become support levels. For example, a $3.00 resistance level may hold up for months, but after shares finally trade at $3.01 and above, that $3.00 level now becomes support.
Identifying resistance levels can be useful for investors who watch the TA pattern and only buy penny stocks that break through. They also serve those traders who want additional clarity of what price to sell shares.