Using key support levels to improve buying penny stocks
Fundamental analysis is the primary factor to consider when investing long-term. To that end, our monthly newsletter picks fundamentally-sound companies and the Bowser Game Plan focuses on when to exit your long-term positions versus buying penny stocks.
However, we are often asked how we set our entry targets or how to get better entry points. For this, we employ two technical charting techniques: support and resistance and moving averages. Don't be intimidated, these methods are simple, and we'll break them down for you.
This article covers buying penny stocks at historical support, including how to identify these key levels and set automated orders to open a new position or add to an existing position.
Content for this article was adapted from the July 2021 front page article.
Setting the period
When charting long-term positions, daily and weekly period charts will be your friend. We prefer to use weekly period for charting support and resistance because they are more likely to give clear zones.
If your brokerage does not offer a free chart platform, visit StockCharts.com. The website allows you to search for and customize any stock chart.
Defining support zones
Charting support and resistance levels is popular among active portfolio managers. These key levels can signal trend shifts if they prove to be formidable. As a result, they are mainly used for setting buy or sell orders in advance. When buying penny stocks, the easiest way to envision support levels is as zones and not one price level.
Below is a chart example of a support zone for Altigen Communications (ATGN):
Key levels are tested frequently and will not always immediately push the stock in the opposite direction, as you can see on the chart above. Therefore, thinking of them as zones keeps it simple and reduces the amount that you'll second guess yourself.
Candlestick charts are by far the most popular for charting. So, before jumping into identifying support zones, we need to review candlestick basics. Below are the basics of reading a candlestick:
Wicks represent the highest and lowest prices for whatever time period you are analyzing. For example, if each candlestick on the chart represents one week, then the tip of the upper and lower wicks show the highest and the lowest prices for that week. If the price increased, then the closing price for the week is on the upper end and vice versa.
With that understanding, support zones typically form right after a large pullback. The trick to identifying a support zone is to mark the lowest price of that pullback to the lowest closing price. Below is the same candlestick chart of ATGN at a closer view:
Both large pullbacks created noteworthy support zones that could be used as future entry points.
To automate buying penny stocks at these levels, you can set “Good Till Canceled (GTC)” limit orders ahead of time. Then, if the price drops into the support zone, you get a great entry point without having to frequently watch the stock.
Most brokerages offer this order type. If you have questions on submitted a GTC limit buy order, contact your brokerage.
Example of buying penny stocks at support
Using ATGN as an example, a support zone was established between the 6/24/19 weekly close of $1.05 and the 6/17/19 weekly low of $0.88. Upon identifying this zone, a long-term penny stock investor set a GTC buy limit order at $1.05.
That buy order hit during the next pull back in September 2019, three months later. Patience pays in long-term investing.
ATGN rose to $1.88 prior to the COVID-19 sell off, which offered another buying opportunity at the same key zone of $0.88-1.05. The stock also set a new low ($0.77) during the week of 3/16/20. An investor could've used this as another buying opportunity and entered another GTC buy limit to add size.
Following the reversal off of this key support zone, ATGN hit a new high of $2.43, a 138% gain from the $1.05 entry. The stock then established another key support zone from $1.80-$2.00 on the pull back off of the new high. This then offered another opportunity to set a GTC limit buy order.
Of course, essential to the Bowser Game Plan, it's best to ensure that the company is still profitable and has a Bowser Rating of 8 or more prior to establishing an initial position or adding size to an existing position. This information can be found in our monthly newsletter.
Using this simple technical charting method, you can improve your entry points when buying penny stocks. The weekly time frame ensures that you capitalize on the best buying opportunities. Meanwhile, setting automated orders accomplishes two things:
- It prevents you from having to watch stocks around the clock; and
- It prevents you from making emotional decisions based on the fear of missing out (FOMO) when a stock is in an uptrend.
Give this simple technique a try. If you are unsure and want to practice, try backtesting it first and then paper trading to get the hang of this new entry method.