Here's the Next Small-Cap Stock the Spec Money Will Chase

 DELAFIELD, Wis. (Stockpickr) -- Speculative money has returned to the markets with a vengeance in the small-cap arena, and it's hitting the tape across a number of sectors.

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Just take a look at the performance of intellectual property player Spherix (SPEX) on Tuesday. This stock exploded higher by 96% with massive upside volume after the U.S. Senate and Senate Judiciary Committee Chairman Patrick Leahy removed a patent reform bill from the committee's calendar due to lack of bipartisan support. Traders bought shares of SPEX with no hesitation, pushing the stock above a number of key overhead resistance levels at $1.86 to $1.99 a share with heavy upside volume flows. Volume on Tuesday registered 45.16 million shares, which is well above its three-month average action of 1.46 million shares.

Another small-cap stock that exploded higher on Tuesday was biotechnology player Prana Biotechnology (PRAN), which ripped to the upside by 21% with strong upside volume flows. This stock has been a favorite target of the short-sellers, with shares down a whopping 72% coming into that sharp spike higher yesterday. Shares of PRAN broke out on Tuesday above some key near-term overhead resistance levels at $1.72 to $1.75 a share with strong upside volume. Volume registered 5.86 million shares, which easily exceeded its three-month average volume of 1.96 million shares.

Another small-cap stock that has seen spec money push its shares sharply higher in recent trading sessions is India Globalization Capital (IGC), which has exploded to the upside over the last month by 111%. This materials and infrastructure company in India and China has ripped to the upside from its May low of 63 cents per share to its recent 52-week high of $2.34 a share with strong upside volume flows. Most of that move was driven by the company's recent announcement that it will focus on the growing medical marijuana industry as an area of acquisition interest.

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If you're a small-cap speculative trader like I am, then the of action in these three stocks is exactly what you want to see. Spec money is flowing back into small-cap stocks, and the volume levels are very healthy. This spec money is hitting a number of sectors, but what I especially like to see is the money coming into the small-cap biotech stocks. That sector has been beaten down big in 2014, so it's nice to see that traders aren't afraid to take on size in that space once some of these names start moving.

Now that it's very clear the spec money faucet is turned back on on Wall Street, I think I might have found the next speculative small-cap stock that traders are going to come after. That stock is MagneGas (MNGA), an alternative energy company that creates a system that produces hydrogen-based fuel through the gasification of liquid and liquid waste.

This stock has been on fire over the last three months, with shares up by 87%. MagneGas has a market cap of $41 million and an enterprise value of just $32 million. MagneGas doesn't have much to show for revenue yet -- for the three months ending on March 31, its revenue was $191,601 -- but that figure was a 46% increase from the same period last year at $130,840. This company also recently raised $9 million in working capital, which the CEO said on the conference call will provide the company with 18 to 24 months of cash to implement its growth strategy.

MagneGas is a speculative company but a very interesting one. The firm is a waste to energy company that converts liquid waste into hydrogen-based fuel, and it owns the patent "Plasmac Arc Flow," which is a process that gasifies or sterilizes a number of liquid wastes and produces a gaseous fuel known as MagneGas. MagneGas fuel can be used for metal-cutting, cooking, heating or powering natural gas bi-fuel automobiles. The recyclers that can be processed into MagneGas are sewage, sludge, agricultural waste and industrial waste liquids.

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If you consult the chart for MagneGas, you'll notice that this stock has recently pulled back sharply from its March high and 52-week high of $2.45 a share to its recent low of $1.12 a share. Shares of MNGA have now started to trend sideways after hitting that $1.12 low, with the stock moving between around $1.20 on the downside and $1.45 on the upside. This sideways chart pattern shows that shares of MNGA are consolidating after its recent pullback, and that consolidation could be taking place before the stock is ready to return to its uptrend and spike sharply higher. Shares of MNGA are now starting to spike higher off that $1.20 support area and it's quickly moving within range of triggering a major breakout trade.

Traders should now look for long-biased trades in MNGA as long as it's trending above some near-term support levels at $1.22 or at $1.16 and then once it breaks out above its 50-day moving average of $1.41 a share and then once it clears more key overhead resistance levels at $1.44 to $1.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.98 million shares. If that breakout materializes soon, then MNGA could be the next small-cap spec stock that makes an explosive move higher. The next major overhead resistance levels after $1.44 to $1.45 a share are $1.79 to $1.82 a share. This stock could easily explode back towards its 52-week high of $2.45 a share or even higher of $1.79 to $1.82 to get taken out with volume.

The bottom line: Spec money is once again flowing on Wall Street as smart traders chase small-cap stocks that have interesting stories or beaten-down charts (or a combination of the two). With that in mind, traders tend to chase the same spec stocks that worked before following their pullbacks once the spec money has returned. This is what has me very interested in shares of MNGA here, since this was a favorite target of the spec money before and now has a chart that's once again setting up for a potentially explosive move.

-- Written by Roberto Pedone in Delafield, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

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