Several days ago we were watching Challenger Energy Corp. (Stock Symbol: CHQ).  This microcap had finally broken through a resistance level and momentum could have possibly taken it to higher levels.  Rather than relying on momentum which is the general rule for penny stock trading, microcaps can, and often do, follow the rules of the price and volume relationship in the world of technical analysis.  See the chart below.

CHQ

Using my crude but available Paint program, I have labelled key areas that should not be ignored.  A full understanding of these areas can be quite profitable when all the “stars align”.

The horizontal line labeled support and old resistance indicates the area where this stock had bumped into on the way up and stopped dead in its tracks and fell back to lower levels. Look back along the full six months.  CHQ had come in contact with this line (at about $5.10) on several occasions. 

Notice near the end of June the huge white candle that broke through this resistance.  This candle was accompanied by very high volume which is a good sign that the price will continue to move in this upward direction.

CHQ retraced briefly and then surged upward (note the arrow pointing to the white candle at the beginning of July labeled “low volume”.  CHQ had made a new new six month high but lacked the volume of the intra-day high three days earlier.  Making new highs on lower volume can often indicate weakness in price action as was true here.  The stock then retreated, falling back to that old resistance line. 

CHQ is now at a pivotal area where past resistance may truly be new support. Trading at or above the $5.10 area is required, and increasing volume should accompany any upward price move.  If this starts to slide back below “support”, the next stop will be $4.00 and those that ’short’ will be glad they did.