Wall Street was a very busy place on Monday. Investors were hit with a barrage of news from the major buyout of drugmaker Wyeth (WYE) by competitor Pfizer (PFE) for $68 billion, to the announcements of huge layoffs from the likes of Caterpillar (CAT), Sprint Nextel (S), Pfizer (PFE) and General Motors (GM).

The Dow Jones Industrial Average traded in a 200-point range from the lows to the highs before closing up 38 points, or 0.48%, to 8,116.03, while the S&P 500 added 4.62 points, or 0.56%, to 836.57. The Nasdaq rose 12.17 points, or 0.82% to 1,489.46, and the stand out index of the day was the Russell 2000 (small-cap stocks), which jumped 5.70 points, or 1.28%, to 450.06.

Many traders were surprised to see the markets finish (just slightly) higher, especially when you consider the explosion of layoffs among some of America’s biggest blue-chip companies.

The market can often be a confusing place, driven by forces that don’t seem to be logically moving the price of financial instruments.

It’s probably true that some investors deemed the layoffs to be bullish news because companies will save money as they enact more cost cutting measures. However, from a fundamental perspective, the layoffs were widespread across different sectors, which points towards more problems ahead for the global economy.

Playing the market is not an easy task for any investor. One way that market players can cut through the noise on Wall Street is to simply examine the charts for hints to the behavior of those who truly control the price of stocks -- institutional investors.

Examining stock charts, also known as technical analysis, can offer investors clues to the future price of a stock. One popular form of technical analysis is the use of chart pattern recognition.

Chart patterns allow investors to analyze and organize all of the buying and selling by the bulls and bears into a concise picture. Patterns are usually formed by identifying support and resistance levels and by drawing trend lines.

Now, since the Russell 2000 was the biggest gainer among the major U.S. indexes yesterday,
let’s take a look at the charts of four small-cap stocks that could be set to make a big move.

1. Taser

Investors looking for a small cap play should take a close look at Taser International (TASR). Taser develops and manufactures advanced electronic control devices designed for use in the law enforcement, military, corrections, private security and personal defense markets. On Monday, the company announced that the Brazilian National Guard has placed an order to buy 4,000 stun guns.

Shares of Taser have traded through an important downtrend line (check out the chart below) and are making higher lows. The stock is trading above the 50-day moving average ($4.53) and looks ready to make a run back to previous resistance at around $5.75 a share.



Source: StockCharts.com

2. Geron

If you’re looking for a small-cap company that has been in the news lately, you need not look any further than Geron Corporation (GERN). This company is developing biopharmaceuticals for the treatment of cancer and chronic degenerative diseases, including spinal cord injury, heart failure and diabetes.

Last Friday, the stock soared as much as 43% after the U.S. Food and Drug Administration gave the company clearance to start trials for the first-ever human trial of embryonic stem cell therapy. This is definitely bullish news. However, the stock is now approaching resistance at around $10 a share. Volume on Friday topped 50 million shares, but only 30 million shares traded hands on Monday.

If you are in this stock, watch the action very closely at current levels. Shares of Geron could easily fail at resistance or it could breakout and head much higher. A very good trader once advised to never trade your opinion; just let the stock’s action guide you in your investment decisions.



Source: StockCharts.com

3. Smith & Wesson

Another small-cap stock that has an interesting chart is firearm manufacturer and exporter Smith & Wesson Holding (SWHC). This company manufactures an array of pistols, revolvers, tactical rifles, hunting rifles, black powder firearms, handcuffs and firearm-related products and accessories. Investors who bought this stock based on the thesis that a recession would lead to higher gun sales as consumers looked to arm themselves for protection, have been burned. The stock has fallen sharply from its 52-week high of $7.77 a share, to around $2.40 a share. However, things could now be changing for Smith & Wesson.

The chart for SWHC is starting to show some bullish patterns, with the stock making higher lows and trading above its 50-day moving average ($2.37). See the chart below for more details.



Source: StockCharts.com

4. Yingli Green Energy

One final small-cap chart worth considering is alternative energy company Yingli Green Energy (YGE). Yingli is a vertically integrated photovoltaic product manufacturer in China. This stock has fallen hard from its 52-week high of $28 a share, to the low $5-range. The decline in crude oil from record July-highs of $147 a barrel most likely had a lot to do with the stock’s fall. However, President Obama has made it clear that he plans to increase the use of alternative energy sources, which could mean more business and growth for Yingli. View the chart to see why this stock could possibly trade up soon.



Source: StockCharts.com

To learn about a few more small-cap stocks with compelling charts, check out the Charts of the Week portfolio.

Posted on Jan. 27, 2009