5 Small-Cap Stocks to Trade for Big Gains

BALTIMORE (Stockpickr) -- It should surprise no one that the price action in the big S&P 500 index has been pretty anemic in 2015. Since the calendar flipped to January, the S&P has generated price returns of 1.24% -- and we're almost halfway through the year.

But while the big stocks have been disappointing, smaller stocks have been outperforming.

Year-to-date, the small-cap focused Russell 2000 index has managed to deliver total returns of 5.2%. That means that this index of smaller stocks is on track to hit double-digit returns in 2015.

To benefit from the performance gap, we're turning to the charts for a technical look at five small stocks that look ready to make big moves.

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.

Harsco


 

Up first on our list of small-cap breakout trades is $1.3 billion industrial services firm Harsco (HSC). Harsco has been a major laggard vs. its small-cap peers over the course of the last year. Since last summer, this stock has dropped by more than 38%, dragged lower by hefty exposure to struggling commodity stocks.

Long-suffering shareholders could be in for a reprieve here, though, because Harsco has spent most of 2015 carving out a bottom.

Harsco has been forming a pretty textbook ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares up at $17.50 and uptrending support to the downside. Basically, as Harsco's share price bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above our $17.50 resistance line. When that happens, we've got our buy signal.

Momentum, measured by 14-day RSI, adds some extra confidence to the upside trade in Harsco. That's because Harsco's price momentum has been making higher lows going back to last fall, providing confirmation that buying pressure is building, even while shares have consolidated below $17.50. That's a bullish divergence.

Still, it's crucial to be reactionary here. Don't try to get in ahead of a move higher; Harsco isn't a high-probability trade until $17.50 gets taken out.

UniFirst

We're seeing another long-term ascending triangle setup in shares of $2.3 billion uniform supplier UniFirst  (UNF). In fact, UniFirst's ascending triangle pattern is a little more "textbook" than the one in Harsco. That's because it's showing up after a move higher rather than a leg down.

Either way, the trading implications are pretty much identical on a breakout above the top of the price pattern. For UniFirst, the breakout signal comes on a push above $123 resistance.

Why all of that significance at that $123 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in UniFirst, 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 UniFirst's stock.

The $123 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 $123 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.

Meridian Bancorp


We're seeing a triangle of a different sort in shares of small-cap banking stock Meridian Bancorp  (EBSB). After rallying more than 23% in the last year, Meridian is currently forming a symmetrical triangle, or "coil", pattern, a continuation setup that's formed by a pair of converging trend lines.

Consolidation patterns like the symmetrical triangle are common after big moves – they give investors a chance to catch their breath and figure out their next step. The buy signal comes on a breakout to the topside of the pattern, currently right at the $13.25 level. If shares can catch a bid above $13.25, then Meridian Bancorp is likely to see some new highs.

Relative Strength, (not to be confused with previously mentioned RSI) adds some extra evidence to the upside in Meridian Bancorp right now. That's because relative strength has been in an uptrend of its own since last summer, which confirms that this stock isn't just moving higher -- it's also outperforming the rest of the market long-term. As long as that relative strength uptrend remains intact, expect Meridian to keep on beating the rest of the market too.

Trex


Decking and railing material manufacturer Trex (TREX) has been enjoying a pretty spectacular rally in the last year, buoyed by a housing market that's come alive here in the U.S. Since this time last year, shares of Trex are up more than 66%. But don't worry if you've missed the rally in this $1.65 billion construction materials stock .Trex still looks like a "buy-the-dips stock."

And we're coming up on another buyable dip this week.

The price action in Trex is about as simple as it gets. This stock has been making its way higher in an uptrending channel for a full year now, bouncing on each touch of trendline support at the bottom of the channel. In short, every test of the bottom of the channel has been a low-risk, high-reward opportunity to get into Trex, and as shares test support this week, it makes sense to buy the next bounce higher.

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, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for this bounce to happen first, you're ensuring Trex can actually still catch a bid along that line before you put your money on shares.

Abercrombie & Fitch


Last up on our list of small-cap breakout trades is teen apparel store chain Abercrombie & Fitch  (ANF), a stock that's gotten absolutely shellacked over the course of the last year, gutted by tumbling revenue numbers and management shakeups. But A&F could finally be finding a bottom this week. 

Since March, Abercrombie & Fitch has been forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The setup is formed by a pair of swing lows that find support at approximately the same price level. The buy signal comes on a breakout through the peak that separates though two trough.  For A&F, that's the $23 resistance level on the chart.

A&F is another stock where momentum is signaling a bullish divergence. Our 14-day RSI line made higher lows on each of the two bottoms in Abercrombie's price action. That said, it's important not to try to predict a breakout and buy early. Technical analysis is a risk-management tool, not a crystal ball, and A&F doesn't become a high-probability trade until buyers can muster the strength to push shares above $23.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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