Welcome to post #8.
In the previous post we discussed Resistance. The intangible barrier where sellers just appear one day and bring down the stock price. However, there is something about ceilings; if you hit them hard enough, they crack.
Once a penny stock breaks through a large resistance level, it forms a pattern known as a Breakout.
It is here that the quickest, most aggressive revenue is earned.
Why do acne breakouts always come out so violently? It's all in the head. Two things happen at the exact same time when that ceiling breaks:
Thousands of traders have been waiting to see whether or not the stock could make it to the ceiling and make a move. As soon as it hits the "buy" button, all of them press it simultaneously.
There are traders who actually bet against the stock, hoping that it would bounce off the ceiling, and crash. As long as the ceiling remains, and share prices continue to rise, the short sellers begin to lose money. When they lose their wagers, they have to purchase the stock in order to cover their losses.
You have large new buyers coming in, and struggling short sellers who are buying. It generates absolute frenzy of buying pressure. The price simply skyrockets.
There's a catch, though. (As with all penny stocks there is always a catch).
Remember post #6? The volume chart? This is where you will literally lose your account if a lack of volume.
If a stock is breaking the ceiling, but the volume bars are at the bottom of your screen are small... you shouldn't touch it. It is a trap. That's a Fakeout!
What happens in a Fakeout is the price will just barely peek its head over the resistance line. There will be a group of enthusiastic novices who will run to purchase it. Then, no real volume support and the buying simply dries up and the stock plummets back down under the ceiling.
If volume bars are only really high, then you really just need to buy a breakout. You must prove that the entire market is going nuts crazy.
So, when you see a real big breakout that will have a lot of volume, let's say. When in the scenario above do you actually make the purchase? When the stock is flying, simply pounding on the button will most likely result in a bad price.
In post #9, we will discuss the “Retest” which is the exact, precise time that the pro trader will enter the breakout.