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5 Breakout Trades Under $10 - views
BALTIMORE (Stockpickr) -- No doubt about it: Traders love low-priced stocks.
I'll let you in on a little secret: Share price doesn't really have an impact on your potential investment gains. At least not directly.
But indirectly, it's true that lower-priced stocks also tend to have lower market capitalizations, a fact that makes them statistically more volatile -- and more apt to make noticeable price moves. That, coupled with the psychological effects of buying sub-$10 stocks makes them worth taking a closer look at.
That's especially true after the 24% rally that we've seen in the S&P 500. Since smaller, more speculative names tend to see their most impressive gains after the more staid blue chips have already made their moves, now is a very good time to take a closer look at stocks that trade for $10 or less.
So, today, we're taking a closer technical look at five of them.
If you're new to technical analysis, here's the executive summary.
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at five high-volume stocks to trade this week.
2013 has been a phenomenal year for shareholders in Rite Aid (RAD). Shares of the retail pharmacy chain have rallied more than 278% since the first trading session of the year. But that's not all. The setup in shares points to higher highs in store for this drugstore in the near-term.
That's because RAD is currently forming an ascending triangle pattern, a bullish price setup that's formed by a horizontal resistance level above shares at $5.50 and uptrending support to the downside. Basically, as Rite Aid bounces in between those two technically-important price levels, it's getting squeezed closer and closer to a breakout above that $5.50 level. When the breakout happens, it's time to become a buyer.
Momentum, measured by 14-day RSI, adds some confirmation to the RAD trade. The momentum gauge has been in an uptrend of its own since the middle of the summer. When the breakout happens, I'd recommend keeping a protective stop at $5.
We're seeing the exact opposite setup in shares of Sandstorm Gold (SAND) right now. It's been a rough year for any companies involved in gold, so Sandstorm's gold streaming operations have prompted more than a 50% selloff in shares year-to-date. And thanks to a descending triangle in shares, it doesn't look like the sellers are about to take a break.
The descending triangle pattern is the bearish opposite of an ascending triangle. It's formed by a downtrending resistance level above shares, and horizontal support to the downside. A breakdown below support, currently right below $5, is the signal that it's time to sell or short shares.
In the last few months, that $5 mark has acted as a last bastion of buying pressure for SAND. But if shares suddenly can't catch a bid below that level, then we'll likely see much lower levels before all is said and done.
Don't try to call a bottom on SAND. That's a good way to get positioned on the wrong side of a falling stock.
Meanwhile, small-cap TV broadcaster Gray Television (GTN) is showing some bullish overtones after tracking sideways for the last month and change. GTN is currently forming a cup-and-handle pattern, a classical bullish setup that triggers on a move through the $9.25 level. Don't put too much thought into the cup-and-handle setup itself; instead, just focus on that breakout level at $9.25.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That $9.25 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Sirius XM Radio
Shares of Sirius XM Radio (SIRI) got hammered lower late last month after the firm announced third-quarter numbers that fell short of Wall Street's expectations. But that earnings miss isn't a reason to stay away from shares in November. In fact, now looks like a stellar time to be a buyer in SIRI.
As I like to say, it doesn't take an expert technical analyst to figure out what's going on in shares of Sirius XM. Shares have been bouncing higher within a price channel all year long, and now shares are coming up on a long-term trend line support level. That channel gives us a high-probability range for Sirius' price action going forward; that means that a bounce is likely from here. Wait for that bounce before buying.
Buying off a support bounce makes sense for two big 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 the SIRI can actually still catch a bid along that line.
Advanced Micro Devices
Since we've already looked at one set of opposite patterns today, we may as well look at the bearish opposite to SIRI's trend channel that's forming in one of the most heavily traded sub-$10 names on the NYSE: Advanced Micro Devices (AMD).
AMD is currently in a downtrend from its May highs, forming a channel that's been characterized by lower highs and lows all the way down. While the price channel in AMD isn't quite as established as the year-long uptrend in Sirius XM, it's still very much worth heeding. If you own AMD right now, the ideal "escape hatch" opens up near trend line resistance.
It may be clichéd, but the saying that "the trend is your friend" holds true here. Don't try to catch the bottom in AMD. Instead, if you're looking for a buying opportunity in this stock, wait for trend line support to get taken out. That's the signal that buyers have wrestled control from sellers. Until that happens, this stock is in bear mode.
To see this week's trades in action, check out this week's Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks 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 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
Follow Jonas on Twitter @JonasElmerraji