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5 Stocks Under $10 With Big Upside Potential

Orexigen Therapeutics

One under-$10 name that looks ready to trade much higher is Orexigen Therapeutics (OREX - Get Report), a biopharmaceutical company focused on the development of pharmaceutical product candidates for the treatment of obesity. The bears have beaten down this stock in 2011, with shares off by over 72%.

If you take a look at the chart for Orexigen Therapeutics, you'll see that this stock recently gapped up from around $1.40 to $2.68 a share on monster volume. Following that gap up in price, the stock has now dropped back down toward $2.15 a share. What I like about the setup here for OREX, is that when a stocks gaps up like this, sells off and then challenges the gap high again, it often breaks out. If you want to see an example of this, then look at the chart for Transcept Pharmaceuticals (TSPT), which recently put in a similar pattern.

>>11 Biotech Stocks Loved or Hated by Hedge Funds

Traders should now watch to see if a breakout of OREX can manage to move above some near-term overhead resistance at $2.25 and then above that gap high of $2.68 a share. A move above these levels with heavy volume should set this stock up for a run back toward its 200-day moving average of $3.20 or possibly even higher. Look for volume that's tracking in close to or above its three-month average action of 754,900 shares.

One could be a buyer of this stock off any weakness and simply use a mental stop at around $2 a share, or $1.78 a share if you want to give it more room. I would add to any long position once the stock takes out $2.25 and then $2.68 a share with volume. Keep in mind that any future move over $4.15 a share would be very bullish since it would bring a gap down from $10 into play from back in February.

This stock is heavily shorted with over 11% of the tradable short currently sold short by the bears. Any future breakout for OREX should spark a big short-covering rally since the bears are so heavily involved in this stock.

>>10 Most-Shorted Stocks in Biotech
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