BALTIMORE ( Stockpickr) -- There are breakouts brewing in the low-priced stocks this fall. With a challenging year coming to a close for many low-priced stocks, lots of individual names are starting to look "bottomy" as laggards suddenly shift into playing catch-up with the S&P 500.
As the major market indices go "risk on" again this fall, lower-priced stocks are benefitting even more than the broad market. That's why, today, we're taking a closer look at the trading setups in five stocks under $15.
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 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.
That's why we're taking this technical look at five under-$15 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.
Up first is CNH Industrial (CNHI - Get Report) , an $8.5 billion heavy machinery stock based in Europe. There's no two ways about it -- CNHI has dropped like a rock in 2014. Since the start of the year, shares have fallen more than 24%, contributing to some woeful underperformance in this large-cap equipment maker. But long-suffering shareholders could be in for a reprieve thanks to the price setup that's been forming in shares. Here's what to watch for:
CNHI is currently forming an ascending triangle bottom, a price setup that's formed by horizontal resistance above shares at $8.40, and uptrending support to the downside. Basically, as CNHI bounces in between those two technically important price levels, shares are getting squeezed closer and closer to a breakout above our $8.40 price ceiling. When that breakout happens, we've got a high-probability buy signal on our hands.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in CNH Industrial. That's because our momentum gauge has been making higher lows since CNHI's stock price bottomed in September. That's an indication that buying pressure is starting to build again in shares.
Cratering oil prices have been a boon to airline stocks in the last couple of months -- but Chilean carrier Latam Airlines (LFL) has been slow to react to the falling cost of jet fuel. But it looks early to give up on upside in LFL; shares of this $6.5 billion airline are starting to show signs of a bottom. From here, the price level to watch is resistance at $12.50.
LFL is forming a rounding bottom, a price setup that looks just like it sounds. The rounding bottom indicates a gradual shift in control of shares from sellers to buyers -- the buy signal comes on a push above that $12.50 level that's batted down shares as recently as earlier this month. While the downtrend that's harangued Latam Airlines broke at the beginning of November, it's crucial to wait for $12.50 to get taken out before putting money on shares -- that $12.50 breakout is our indication that buying pressure is strong enough to fuel more upside into 2015.
We're seeing almost the same price setup in shares of Xerox (XRX - Get Report) right now, but with one key difference: this stock's "rounding" bottom is shaping up near the top of Xerox's recent price range, not the bottom. Even though this isn't a "textbook" chart setup, the trading implications are still exactly the same here: the buy signal comes on a move through $14.
Why all of that significance at that $14 level? It all comes down to buyers and sellers. Price patterns like the rounding bottom are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Xerox's stock.
The $14 resistance level was 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 $14 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Our resistance level is getting tested this week -- but it's still crucial to wait for the breakout before you buy it.
In the shorter-term, relative strength has been turning higher, an indication that XRX recently began outperforming the broad market again. As long as that relative strength uptrend remains intact, shares of Xerox should keep outperforming.
Finnish handset maker Nokia (NOK - Get Report) is a high-volume stock with a low share price -- even though shares trade under $10, Nokia is sitting on nearly 20% gains from its February lows as I write. Importantly, that upside in Nokia has been extremely orderly -- you don't need to be an expert technical trader to see why NOK looks buyable here. So, as shares bounce off of support for a fifth time, traders should expect a re-test of 2014's highs.
Despite some bearish price action at the start of the fall, NOK never triggered a downside move. Instead, shares bounced off of trendline support, signaling another buy signal for late-to-the-party investors. Put simply, every test of trendline support has provided buyers with a low-risk, high-reward opportunity to get into shares of this low-priced stock. This latest one is no different…
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 NOK can actually still catch a bid along that line before you put your money on shares.
Mitsubishi UFJ Financial Group
Last, but certainly not least, is Mitsubishi UFJ Financial Group (MTU) . This big Japanese bank has seen its share price largely weighed on by speculation about stimulus from the Bank of Japan. But now, with the BoJ's latest stimulus plans out in the open, MTU can move more freely. In the near-term, the price action in MTU should lead to more upside.
That's because MTU is currently forming an inverse head and shoulders pattern, a bullish reversal setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on a breakout above the pattern’s “neckline” level at $5.90. If buyers can propel this stock above that $5.90 line in the sand, expect a quick re-test of prior highs at $6.30.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” That’s good reason to keep a very close eye on MTU in the next few trading sessions.
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.
At the time of publication, author had no positions in the names mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory that returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji