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TheStreet Open House

A Horrible Chart That's About to Get a Lot Better

Stocks in this article: GIMODRL

DELAFIELD, Wis. (Stockpickr) -- Could a new trend be developing in which the worst-looking stock charts end up providing the biggest gains?

>>5 Rocket Stocks to Beat a Sideways Market

Just take a look at what shares of banking player Doral Financial (DRL) did on Friday. This stock exploded higher off its 52-week low of $1.87 to its intraday high of $4.05 a share with monster upside volume. The chart for DRL coming into that move was an absolute disaster. This stock had dropped from its March high of $13.25 a share to that 52-week low of $1.87 a share. Shares of DRL had gapped down in May from just under $10 a share to under $4 a share with heavy downside volume. This stock continued to slide lower to its 52-week low with strong downside volume flows.

The chart for DRL was a technical nightmare, but finally on Friday the market decided that it was too much and the selling was overdone. Shares of DRL were so oversold that it had a relative strength index reading of close to 10 before buyers finally stepped in and bought the stock in size. That's an extreme reading, and the monster move higher in the stock on Friday shows that shares of DRL had gone down too far too fast. Traders are still chasing this oversold chart today, with shares up 7% as I type this and approaching another breakout above resistance at $4.47 a share.

>>3 Stocks Breaking Out on Unusual Volume

Charts like DRL's are prevalent throughout this market right now, especially in the small-cap complex since that segment has been under pressure of late. To illustrate my point, just pull up the charts for such stocks as Prana Biotechnology (PRAN), Voxeljet AG (VJET), Himax Technologies (HIMX), Uni-Pixel (UNXL) and FireEye (FEYE). You'll see some breathtaking technical destruction in these names. The bears have feasted on many of these names, but they might have overreached now, and it's time for some bullish action to take over.

One stock that jumps off my screen is Gigamon (GIMO), which designs, develops and sells products and services that provide customers with visibility and control of network traffic for enterprises and services providers in the U.S., rest of the Americas, Europe, the Middle East, Africa and the Asia Pacific. Shares of GIMO have been absolutely destroyed by the bears over the last three months, with shares off sharply by 46%.

Gigamon has a market cap of $536 million and an enterprise value of $393 million. This stock trades at a fair valuation, with a forward price-to-earnings of 27.50. Its estimated growth rate for this year is -37.7%, and for next year it's pegged at 84.8%. This is a cash-rich company, since the total cash position on its balance sheet is $142.67 million and its total debt is zero.

>>5 Hated Earnings Stocks You Should Love

Recently, Gigamon reported revenue for the first quarter of 2014 of $31.8 million, vs. $25.8 million in the first quarter of 2013, which marked growth of 23% year-over-year. Non-GAAP gross margins were 75% in the first quarter of 2014, vs. 79% in the first quarter of 2013. However, net losses expanded to 7 cents per share from profits of 2 cents a share in the same period last year. That revenue figure was a disappointment, since the previous guidance was for $34 to $35 million. That revenue miss and gross margin slip was blamed on one expected large transaction from an existing customer in EMEA that did not come to fruition.

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