BALTIMORE (Stockpickr) -- Sometimes, good things come in small packages. That's certainly true in the investing world, where trading setups in the lowest-priced names can often pack the biggest punch.
Today we're taking a look at five high-probability setups in small, low-priced stocks.
From a psychological standpoint, there's something magnetic about low-priced names. That's the only explanation for the elevated trading volumes in the under-$15 stocks.
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 names tend to trade more actively than pricier stocks of similar market capitalization. And when stocks under $15 start making moves, the gains can be substantial on a percentage basis.
Since the beginning of the summer, low-priced stocks have been seeing favor in the broad market again as investors crank up their risk tolerances. And that's making some small names tradable for big gains right now. That's why we're taking a technical look at five stocks under $15 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.
Thompson Creek Metals
Up first is small-cap mining company Thompson Creek Metals (TC) . This small mining stock cratered at the end of last year, only to rebound in a big way at the start of this year. If you'd picked up shares on Jan. 2, you'd be crushing the broad market with 28% gains year-to-date.
But don't worry if you missed the big move; TC looks primed for a second leg higher in September.
That's because Thompson Creek is forming a textbook ascending triangle pattern. The ascending triangle is a bullish price setup that's formed by horizontal resistance above shares (at $3.10 in this case) and uptrending support to the downside. Basically, as TC bounces in between those two technically significant price levels, it's getting squeezed closer to a breakout above that $3.10 price ceiling. When that happens, we've got a buy signal on our hands.
Relative strength adds some confidence to the upside trade in TC: the relative strength line has been making higher lows since shares bottomed back in December. As long as that uptrend in relative strength stays intact, TC should keep outperforming the S&P 500.
We're seeing the exact same setup right now in shares of McDermott International (MDR - Get Report) . The key difference with the ascending triangle in MDR is that the price action hasn't been quite as pretty as in TC; shares have seen much more haphazard trading since this pattern started forming back in late March. But even if the chart looks a bit rough, the trading implications are exactly the same on this trade. The buy signal in MDR comes on a breakout above resistance at $8.25.
Why all the significance at $8.25? It all comes down to buyers and sellers. Price patterns are a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for McDermott's stock.
The $8.25 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 $8.25 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for that breakout before you buy.
Golden Eagle Entertainment
Small-cap airline entertainment platform stock Golden Eagle (ENT - Get Report) is another low-priced breakout trade -- but the good news is that this one triggered in yesterday's session, making it buyable today. You didn't want to own ENT before this week; shares are down more than 12% this year thanks to a constant selloff since the end of the first quarter. But shares started looking "bottomy" at the start of the summer, and yesterday's close above $12.50 is triggering a buy.
Golden Eagle is currently forming a double bottom, a bullish price pattern that looks just like it sounds: The double bottom is formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal came on a push through the resistance level that separates those two lows. For ENT, that breakout level to watch was $12.50.
It's not hard to see why 2014 has been a good year for investment brokerage firm BGC Partners (BGCP) . With a global rally in the equity market this year, rising trading volumes and account values are buoying profitability at brokers. But it's not just the fundamental picture that looks attractive in BGCP. Shares are looking solid from a technical standpoint in 2014 as well, and you don't need to be an expert technical trader to see why.
The setup in BGCP is about as simple as they get. Shares have been bouncing their way higher in a well-defined uptrending channel, a setup that's formed by a pair of parallel trend lines that identify the high-probability range for shares of BGC Partners to trade within. Put simply, every test of trend line support has provided buyers with a low-risk, high-reward opportunity to get into shares of this low-priced stock. So now it makes sense to buy the next support bounce.
Momentum adds some extra confidence in BGCP's upside potential right now: 14-day RSI has been making higher lows, even as shares have retraced to the bottom of the channel. That's a bullish divergence in RSI that points to a bounce in shares this week. The 50-day moving average has been a good proxy for support on the way up. I'd recommend keeping a protective stop on the other side of it.
Strategic Hotels and Resorts
Strategic Hotels and Resorts (BEE) is another textbook uptrending channel to trade this week. Like BGCP, BEE has been bouncing its way higher in a well-defined uptrend, giving buyers a low-risk opportunity to get into shares on every successive test of trend line support. Now it makes sense to buy the next bounce off of that trend line.
Waiting for a bounce is important for two key reasons: It's the spot where shares have the furthest 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 you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring BEE can actually still catch a bid along that line before you put your money on shares.
It looks like we're seeing that bounce this week as shares come up off of the 50-day moving average that's also been a good support proxy for BEE. If you decide to buy here, that level is a good place for a stop once again.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.