Investors have been fixating on big numbers in 2017 -- namely Dow 20,000. But for the biggest gains, it actually makes sense to look at lower-priced stocks.
It's a bit of an odd piece of market psychology, but it's true: often, the biggest gains come from the lowest-priced stocks.
We saw that happen last year when the best-performing 10% of S&P 500 components started 2016 with an average price that was approximately just half the average price of the entire index. When all was said and done, the average S&P component that started last year below $15 ended with 27% gains, stomping the average return of the rest of the index.
And we're already seeing that happen with some conspicuous examples this year too -- lower-priced stocks like NRG Energy (NRG) - Get Report, Xerox (XRX) - Get Report, and Freeport-McMoRan (FCX) - Get Report are all up by double-digits in 2017. And some of the most interesting trading setups for the month ahead are showing up in stocks that trade for $10 or less. Those low-priced stocks come with higher volatility, both up and down. By filtering out the high-probability upside setups, you can supercharge your portfolio this year.
Just so we're clear, a low share price doesn't necessarily mean that we're talking about a small company, or even a "cheap" one by valuation standards - in fact, by itself, share price isn't a very useful metric at all. But it's true that lower-priced stocks do tend to trade more actively than pricier stocks of similar market capitalization. We've already seen how low price correlated with high returns last year.
And when stocks under $10 start making moves, the gains can be substantial on a percentage basis.
That's why we're taking this technical look at five under-$10 stocks today.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
There's been a lot to like in the price action of mobile phone carrier Sprint (S) - Get Report lately. Since August, this $35 billion holding company has rallied 48% higher, leading the telecom industry along the way - and the good news is that Sprint is giving traders a second chance to pull the trigger on a breakout that just triggered last week.
Sprint spent the last month and change forming an ascending triangle pattern, a bullish continuation setup that indicated more upside ahead. The breakout came on a rally through $9 resistance, just a handful of trading sessions ago -- and now, a "throwback" is giving traders a second chance to buy the bullish signal in Sprint.
A throwback happens when a stock breaks out, and then moves back down to test newfound support at that former price ceiling level - in this case, our $9 price level. And while throwbacks look ominous, they're actually constructive for stock prices because they re-verify the stock's ability to catch a bid at support. For that reason, it's best to think of a throwback as a buying opportunity in Sprint, not a red flag. From a risk/reward standpoint, the next bounce off of $9 is the buying opportunity.
Banco Santander Brasil
We're seeing a similar trading setup in shares of Banco Santander Brasil (BSBR) - Get Report, but with two big exceptions: Santander's ascending triangle setup is shorter-term, and it hasn't broken out yet. For BSBR, the buy signal comes on a push through resistance up at $10.10.
That $10.10 price level sounds pretty specific, but it's not created magically. Instead, the price that triggers the breakout in Banco Santander Brasil is fueled by buyers and sellers in this $38 billion Brazilian bank. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for BSBR's shares themselves.
The $10.10 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $10.10 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Shares are within grabbing distance of $10.10 here, but Monday's correction in the broad market is prolonging the pattern by another trading session or two.
Meanwhile, things are looking pretty straightforward in shares of $6 billion energy stock Chesapeake Energy. (CHK) - Get Report. This low-priced oil and gas stock has been taking advantage of the broad commodity rally over the course of the last year, bouncing its way higher in a well-defined uptrend since the first quarter of 2016. Put simply, Chesapeake has been a "buy the dips stock" over the long-run - and shares are approaching another buyable dip this week.
The uptrending channel in Chesapeake is formed by a pair of parallel trendlines that have identified the high-probability range for this stock to remain stuck within since March. In a nutshell, every test of trendline support so far has provided buyers with a low-risk, high-reward opportunity to build a position. Now, as CHK moves down to test support for the seventh time, it makes sense to buy the next bounce off of the bottom of the channel.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring Chesapeake Energy can actually still catch a bid along that line before you put your money on shares.
Turkcell Iletisim Hizmetleri
As I mentioned a moment ago, all trends eventually change. That's exactly what we're seeing in shares of $6.6 billion telco Turkcell Iletisim Hizmetleri (TKC) - Get Report, a Turkish wireless service provider that trades here at home on the NYSE. Turkcell spent most of the last year in a well-defined downtrend, shedding about 40% of its dollar-denominated market value from peak to trough over that stretch. But the trend looks like it's reversing in 2017 thanks to a breakout that happened last week.
A handful of sessions ago, Turkcell broke through its trendline resistance level for the first time since the pattern first started forming, signaling that this stock could be about to make up for lost time this winter. Price momentum, measured by 14-day RSI, is the side-indicator that gave investors their first hints that this stock could be about to make a material technical move - momentum had been range-bound below 65 since the downtrend started, but the new highs set alongside the price breakout add confirmation that the move we're seeing is material.
If you decide to play the change in Turkcell's trend, consider parking a protective stop on the other side of the 50-day moving average. That's because, if the 50-day gets violated, this stock has re-entered its downtrend and you don't want to own it anymore.
Last up on our list of low-priced breakout setups is $23 billion Indian banking company ICICI Bank (IBN) - Get Report. IBN is another stock that's been in a long-term uptrend, but more recently, shares have given back about 10% of their market value as they retreated from the top of their price channel back to the lower bound. Now, this low-priced stock looks "bottomy" in the near-term, ready for another leg higher - here's why...
IBN has spent the last few months forming a pretty textbook example of an inverse head and shoulders pattern, a bullish reversal pattern that signals exhaustion among sellers. The pattern is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through ICICI Bank's neckline just above the $8 level.
Shares tested breakout territory on Friday, but that didn't get confirmed on Monday under the weight of the broad market correction in stocks. Wait for a close above $8 followed by another consecutive open above that price tag before pulling the trigger on IBN. From there, the next potential stumbling point for shares is prior resistance up at $8.70.
At the time of publication, author had no positions in the stocks mentioned.