Stock Quotes in this Article: KGC, OEH, RTK, SAN, SGMO

BALTIMORE (Stockpickr) -- There’s just something about the small stocks. Small stocks -- namely the ones priced under $10 per share -- tend to be more exciting than their higher-priced brethren. Their price swings are more pronounced, and they historically rally the hardest after pricier names have already puttered out.

And of course, that increased volatility goes hand-in-hand with increased upside potential.

A lot of what drives small stock performance is psychological. A share price under $10 gets a lot of people thinking “cheap” regardless of valuation; that’s especially true among newer investors, who put a lot of weight on share price when making investment decisions. The truth is that even more risk-averse investors can find attractive trading opportunities in low-priced stocks, it’s just a matter of identifying the high-probability setups.

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That’s why we’re taking a technical look at five stocks under $10 that are forming attractive trading setups this week.

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.

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While some of the names we’re looking at today are hardly small, their low prices mean that they still trade the same way. Without further ado, here’s a look at five technical setups under $10.

 

 

Sangamo Biosciences

Up first is Sangamo Biosciences (SGMO), a small-cap drug maker that’s been been on a roll this year. So far in 2012, Sangamo has rallied almost 90%.

Shares could be in store for even more upside. That's because SGMO has been forming a bullish ascending triangle pattern for the last couple of months.

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In short, the ascending triangle is a pattern that’s formed by a horizontal resistance level above shares and uptrending support below them. While SGMO’s setup isn’t a perfectly textbook example of an ascending triangle pattern, it’s still a very tradable name this month. Sangamo currently has resistance at $5.75, a price that’s actually been acting as resistance since back in late February, before the triangle itself started forming. The longstanding nature of that resistance level adds some extra confirmation to the setup right now.

Obviously, patterns like the ascending triangle don’t work because of magic or geometry -- it all comes down to supply and demand in the market. That resistance level at $5.75 is a price where there’s historically been a glut of supply of SGMO shares that has overwhelmed buying pressure. A breakout above that price means that the excess supply has been absorbed by increasingly eager buyers, switching the likely price action to the upside.

That’s why SGMO becomes a buy if it can breakout above $5.75.

Kinross Gold

With a market capitalization of $10 billion, Kinross Gold (KGC) is hardly a small stock -- but it is a low-priced stock, with a share price that’s trading under $9 today. Shares of the mining stock have been hit hard in 2012, slipping more than 23% so far this year as gold prices have come under pressure and KGC’s operations have lagged peers. But that could be about to change.

That’s because Kinross is currently consolidating in a formation known as a rectangle. For KGC, the pattern is bounded by resistance at $9 and support at $7.50. Often rectangles are continuation patterns, which means that Kinross would be headed lower, but with shares testing resistance, a reversal in KGC looks even more likely.

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Momenutm, measured by 14-day RSI, adds some evidence to an upside turn – RSI has been in an uptrend since early May, giving investors an indication that KGC’s price has been increasing at an increasing rate. Since momentum is a leading indicator of price, that’s a very good sign. Look for a sustained breakout above $9 resistance as a buy signal.

Banco Santander

Banco Santander (SAN) is another name that’s not small by any means, but is still a sub-$10 stock. The $67 billion Spanish bank has been under major pressures from the ongoing Eurozone debt debacle, pulled even lower by the fact that the bank’s home base is one of the PIIGS countries that sparked the whole mess.

But like Kinross, there’s reason to believe that there could be some upside in SAN in the near-term.

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Right now, Santander is forming a double bottom pattern, a setup that’s formed by two swing lows that find bottom right around the same price level. In a sense, a double bottom is basically a more orderly version of the rectangle in Kinross. Instead of bouncing nonstop between horizontal resistance and support levels, the double bottom only tests support twice before buying pressures push it back out of the channel. That’s why this pattern is more ostensibly bullish than the rectangle.

Santander actually already broke out in the middle of August, pushing through its breakout level at $6.75. But a throwback in shares is giving traders a second chance at riding this stock higher again, after shares pushed above the 200-day moving average in Friday’s trading session.

If you decide to be a buyer here, I’d recommend keeping a protective stop at $6.25.

Rentech

The opposite pattern is forming in shares of Rentech (RTK) right now.

Unlike Santander, Rentech is forming a double top pattern, a setup that -- not surprisingly -- is formed by two swing highs that top out around the same price level. Here, the short signal comes on a slide below $1.70.

In real terms, $1.70 is the price where RTK was able to catch a bid on its last slide lower, so a slip below $1.70 tells us that the bids aren’t there anymore. That’s likely to spur even more selling as RTK goes from green to red for the year.

Momentum adds some useful evidence to this trade as well: RSI has been in a downtrend since November 2011, a long-term degradation that tells us even though the stock has tried to make moves higher in 2012, each successive push has been weaker than the last. It’s critical not to be early on this long-term trade; don’t sell shares until it slips below that $1.70 support level.

Orient-Express Hotels

 


Small-cap luxury hotelier Orient-Express Hotels (OEH) has been hemming and hawing for much of 2012, but now, the $8 stock looks well positioned push higher. While shares of OEH slipped hard in May, this firm has followed the broad market in an orderly rally for the last few months.

With shares bouncing within an uptrending channel, traders have an opportunity for a low-risk entry point right now.

That’s because OEH is currently testing trendline support, the lowest price the stock can reach within the channel. It’s very important to wait for a bounce off of support before becoming a buyer here. After all, support levels do eventually break, and when OEH’s does, you don’t want to be left holding the bag.

Risk is reduced because shares are so close to support right now. Clearly, if you’re buying OEH to ride the channel higher, a breakdown below support means that you don’t want to own the stock anymore. That’s why it makes sense to keep a protective stop just under the price channel after you buy.

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.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.