Here's an interesting piece of market psychology for 2017: some of the biggest gains in this market are coming from the lowest-priced stocks.
That's not a new phenomenon. In fact, we also 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 rest of the 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 that most investors saw.
This year, some of the most interesting trading setups for the month ahead are showing up in stocks that trade for $10 or less. 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.
Leading things off is oil and gas services stock Noble Corp. (NE) , a $1.7 billion stock that's finally showing some signs of life after a prolonged correction in 2016. Shares bottomed back in November, and they've rallied almost 50% higher in the months since. Don't worry if you've missed that large upside move though; Noble looks primed to kick off a second leg higher as we head into March.
Noble has spent most of the last few months forming a textbook example of an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $7.75, and uptrending support to the downside. Basically, as Noble pinballs in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout through that $7.75 price ceiling. When that breakout happens, we've got a new buy signal in NE.
Relative strength, measured by the indicator down at the bottom of Noble's chart, adds some extra confidence to the upside trade. That's because our relative strength line is holding onto its uptrend from November, making a series of higher lows that indicate Noble's outperformance isn't slowing this winter. Once $7.75 gets taken out, it's time to be a buyer in this energy stock...
Cousins Properties Inc.
We're seeing the exact same trading setup right now in shares of Cousins Properties Inc. (CUZ) , a mid-cap commercial REIT. While investors have been anxious about REITs during the last quarter, that hasn't slowed the rally in Cousins' price action since last year—and now, shares are showing off an ascending triangle pattern that indicates the potential for more upside ahead. For Cousins, the buy signal comes on a push through $8.75.
Why is the $8.75 level in particular so important for shares of CUZ? It all comes down to the supply and demand created by buyers and sellers in this stock...
The $8.75 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 $8.75 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
The 50-day moving average has been acting like a decent proxy for support since January. For that reason, once Cousins Properties breaks through the $8.75 level, it makes sense to park a protective stop on the other side of the 50-day.
Meanwhile, shares of office supply retailer Staples Inc. (SPLS) has done a whole lot of nothing in 2017. Since the calendar flipped to January, Staples is up a little over 2%, trailing the rest of the market by an appreciable margin. But that sideways grind in shares of Staples is actually setting this stock up for a breakout move in March. Here's why...
Since retreating from its highs in mid-December, Staples has been forming a pretty textbook example of a double bottom, a bullish reversal setup that looks just like it sounds. The double bottom pattern is formed by a pair of swing lows that bottom out at approximately the same price level—they're separated by a price peak that identifies the breakout level for the trade. In Staples' case, that breakout buy signal comes on a push through resistance up at $9.50.
Price momentum, measured by 14-day RSI up at the top of SPLS' chart, is the side-indicator to pay attention to in Staples. Our momentum gauge made higher lows over the course of SPLS' double bottom pattern, signaling that buying pressure has been building despite the go-nowhere price action in this stock. Once shares materially break through $9.50, it's time to pull the trigger on this trade.
Petrobras (PBR) is a good example of a very big stock with a very low share price. While Petrobras is a $62 billion Brazilian energy company, shares of the U.S.-listed ADR trade right at our $10 price limit. The good news is that you don't need to be an expert technical trader to figure out Petrobras' price action; instead, this price setup is about as simple as they get.
PBR has been bouncing its way higher in a well-defined uptrend since 2016. That uptrend is identified by a pair of parallel trendlines that have corralled most of this stock's price action during that six-month stretch. Even though resistance at the top of the channel hasn't been quite as inviolate as support, it's the support line that we're more interested in for a stock in an uptrend. So, as PBR touches support for the seventh time this week, it makes sense to buy the next bounce higher.
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 Petrobras can actually still catch a bid along that line before you put your money on shares.
Opko Health Inc.
Last on our list of low-priced breakout trades is mid-cap pharmaceutical and diagnostics stock Opko Health Inc. (OPK) . That low price comes largely from the fact that Opko has been an awful stock to own in the last few months—since peaking in December, shares have shed more than a quarter of their market value. The good news is that OPK is showing hints at a reversal higher as we head into March.
Opko has spent the last month forming a 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 OPK's neckline just below the $9 level.Opko is another trade where price momentum adds some extra confirmation to a move higher. This stock's 14-day RSI made a series of higher lows during the price lows that make up the inverse head and shoulders pattern, a bullish divergence that signals accumulation happening at Opko's lower price levels. It may sound a little unintuitive, but it's key to be reactionary with breakout trades like this one—wait for shares to push through $9 before you jump into this trade.