Six Speculative Picks for the Fourth Quarter

This column was originally published on RealMoney on Aug. 15 at 12:35 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Many single-digit stocks have lost their footing this summer as market players turn away from these highly speculative issues.

But constructive patterns throughout the group suggest these issues will move considerably higher in the fourth quarter.

So let's inspect six top prospects in the under-10-bucks category.

What are the advantages and disadvantages of single-digit stocks?

On the plus side, they're capable of fast, high-percentage gains.

But the sword cuts both ways, and you can lose a fortune holding too many shares at the wrong time.

It's also true that many small-stock companies aren't profitable and don't have a lot of money in the bank.

So keep in mind that buying small stocks is an act of speculation, not capital preservation.

The best way to play these small wonders is to keep one eye on long-term resistance, keep position size down and take profits without hesitation when price approaches your predetermined reward target.

Qwest Communications(Q Quote) has been on the recovery trail for more than a year now in a powerful rally that should continue into 2007.

The stock just popped up to $9 in the latest leg of its healthy uptrend.

It's consolidating its gains just below that number and could be setting up for a push into double digits in the next 30 to 60 days.

Note the two-month parallel channel with well-defined boundaries at $8 and $9.15.

The best trade entry will come on a low-volume pullback to channel support.

This decline could happen sometime between now and Labor Day, so get this one on your trading screen and watch it closely.

---

Atmel(ATML Quote) dropped to a two-year low last October and began an extended recovery. It reached $5.71 in May and has been moving sideways in a volatile pattern since that time. The late-July decline looks like a rinse job that took a majority of sellers out of the market at the same time. This suggests the next rally to resistance will trigger a multiyear breakout.

It's startling to uncover a chip stock that hasn't gotten beaten up badly in recent months. This is a bullish divergence that shouldn't be ignored. A breakout above $5.50 has decent potential on a percentage basis and could reach the 2004 high just below $8. This resistance level marks the reward target for the setup.

Visteon(VC Quote) began a deep selloff in late 2005 that didn't end until it completed a triple-bottom pattern at $4 in April. It's been rising steadily since that time, pausing once to catch its breadth before embarking on a new rally leg earlier this month. It's now contracting into a high pennant that predicts an eventual move to $10 and beyond.

I'd enter the trade on a pullback to support at $7.35 or a pennant breakout over $9. The longer-term chart shows key resistance at the 2005 high near $11, so I'd consider taking profits as soon as the rally approaches this level. Alternatively, I'd keep a tight stop under the position and exit on any reversal.

Isolagen(ILE Quote) gapped down from a rally high at $5.59 in July 2005, selling off to $1 before starting to recover. It's been moving higher since that time, attracting waves of healthy buying interest. It returned to the breakdown level in late June and started to move sideways in a symmetrical triangle.

The stock has been absorbing supply from the gap down for two months now. It looks like this process is nearing completion and price will move higher soon. The best scenario would be a bullish gap through the original selloff. This spike would set the stage for a continued rally that eventually reaches $8.

Smith & Wesson Holding(SWHC Quote) broke out of a 10-month cup-and-handle pattern in late May. It reached $9.10 a few weeks later and started to pull back. The stock tested breakout support, bounced to the high two weeks ago and sold off once again. The next rally will complete a bullish pattern that should allow price to push up to $10.

There's been more selling pressure than expected since the rally high. This divergence suggests the consolidation pattern will take more time to resolve. So don't be surprised if the stock continues its downward travel right here and retests the summer lows near $7 before starting its breakout run.

Sonicwall(SNWL Quote) rallied to $10.20 in March 2004 and pulled back in a deep correction. It found support more than a year later and started a slow rally back to resistance. The stock returned to the old high six weeks ago, pulled back and started to move sideways. This sets the stage for a multiyear breakout.

The six-week consolidation shows an embedded cup-and-handle pattern. This is bullish for a rally in the next few weeks. The longer-term chart reveals strong resistance above the breakout level, so it might take time for upward momentum to develop. But there's a good chance this stock can double in the next six to nine months.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Isolagen and Smith & Wesson Holding to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

---