Technology is almost always a hotbed for small companies that can become big ones. For every one that makes it, probably 10 fall by the wayside. But that doesn't stop the buyers from buying.
If you are trading the charts and working your trades properly, you too can participate in the quest to double your money. The safe way to do it is to slowly build a position in stocks that have long-term potential while nipping profits on partial sells into strength as you wait. Each time the stock retraces, you put some more shares back on, and each time the stock surges you sell a little. Essentially, you work around a core position while you build that core position larger over time. In the meantime, you put money in your pocket so that if the stock doesn't realize the large gains you are after, you don't end up losing your seed capital.
To work a trade in this way, you need to find a small- or micro-cap stock that has significant long-term potential. And then you need to find a way to participate without undue risk. One such stock might be the
, which designs, manufactures, and markets custom-designed engineered electronic components that are used primarily to control the frequency or timing of signals in electronic circuits. It has moved back to profitability and LGL's charts are brimming with possibilities.
On a long-term chart, share prices have reached the point where they are challenging the highs for the past six years and, most importantly, they are doing so with increasing volume.
When you attack resistance with increasing volume, the odds increase that you will break through the resistance eventually and create a new price floor from which to work. The long-term chart covers over a decade of trading in LGL. As you can see, the resistance zone is in the $15 to $17 area. Beyond that, the next target is way up around $30. That's almost a double if it occurs on this time frame.
Since LGL already has had a huge price increase in a relatively short period of time, you always have to consider the downside possibility even more seriously than the upside. In the case of LGL, this stock could retrace to $7 on this time frame and have absolutely nothing wrong with it. In fact, at that price it would be a screaming buy and therein lies the issue. How can you participate?
The way to participate without huge risk is to shorten your time frames and both establish and trade around a core position. Let's consider how it can be done with LGL. Here's a weekly chart.
In this chart we can once more see the huge support that now exists in the $7 range. There are two anchors at that price point -- the late March and middle of June price bars with huge volume expansion. Since then, price has worked higher but volume has dissipated. The top of the May bar is $12.78 and that represents a potential foothold buy area -- a place to establish your initial position. The next week has a low of $10.70 which would be the second place to establish a position. Since we know that resistance should be heavy between $15 and $17, the upside reward for the partial sell idea would be at an average price of $16. That provides your parameters for trading around the core position.
On the daily chart, the clarity is better since on this time frame you can see the gap that exists between the $8 and $10 price points.
The high volume bar from May 18 will be support on any pullback initially, then the bottom of that bar once more if price declines further. The risk of waiting for the pullback is that you simply miss the trade and there's always a risk in everything. The flip side is that if you barge in at higher prices you run an even greater risk -- the risk that you lose your hard-earned money. Risk first always has to be the modus operandi when trading.
LGL represents an excellent opportunity trade into a stock with huge long-term potential and to do so with reasonable risk by slowly establishing a position then trading around it.
Until next time, just keep trading the charts!
At the time of publication, Little was long LGL, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
, a free educational site for traders and investors. He has been featured in numerous publications and is the author of
His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.