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Here's a bit of market psychology: Sometimes the biggest gains come from the lowest-priced stocks.
Last year, for instance, 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 entire index. In fact, low prices alone were enough to predispose stocks to outperform last year -- the average S&P component that kicked off last year below $15 ended 27% higher than it started, stomping the average return of the rest of the index.
So, what do those stats suggest for 2017?
As I write, some of the most interesting upside trading setups are showing up in stocks that trade for $10 or less. Those low-priced stocks come with higher volatility -- both up and down. And by filtering out the high-probability upside setups, you can supercharge your portfolio this year.
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
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.
Without further ado, let's take a look at five technical setups worth trading now.
Sirius XM Holdings
Up first on our list of low-priced trades is satellite radio operator Sirius XM (SIRI - Get Report) . Sirius XM consistently ranks as one of the most heavily traded issues on the NASDAQ, due in large part to a $4.60 share price. It's also been a notable outperformer in the last year, rallying 20.7% since this time in 2016.
The good news for Sirius XM bulls is that shares could be about to kick off a second leg higher this month.
Sirius XM has spent the last couple of months forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $4.65 and uptrending support to the downside. Basically, as Sirius XM bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout through its $4.65 price ceiling. When that breakout happens, we've got our buy signal.
An extra piece of bullish evidence comes from Sirius XM's relative strength line, the side-indicator down at the bottom of the chart. Relative strength measures Sirius XM's performance versus the rest of the market, and the fact that it's in an uptrend means that SIRI continues to outperform the S&P as we head deeper into 2017. That relative strength trend makes Sirius XM predisposed to outperform in the months ahead...
Lending Club
It's been a challenging year for shareholders in peer-to-peer lending company Lending Club (LC - Get Report) . But with the smoke cleared from the CEO shakeup in May, this stock is finally starting to look like it could have legs again. Like Sirius XM, it's showing off a textbook example of an ascending triangle setup - for Lending Club, the big breakout level to watch is resistance up at $6.50.
What makes that $6.50 level so important for this stock? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for Lending Club's shares themselves.
The $6.50 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 $6.50 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level. LC caught a bid at the very end of December, and now shares are making another run towards $6.50. Wait for buyers to push shares above that price ceiling before you join them.
Ambev
The $80 billion brewing stock Ambev (ABEV - Get Report) has been under pressure lately. Since peaking in October, Ambev has lost about 18% of its market value, underperforming the rest of the stock market by a big margin. But there's good news for Ambev bulls: this Brazilian beverage giant is finally starting to look "bottomy" this winter. Here's why.
Ambev has spent the last two months forming a rounding bottom pattern, a bullish reversal setup that looks just like it sounds. The rounding bottom indicates a gradual shift in control of shares from sellers to buyers - the breakout signal comes on a push above the resistance level that acts like an initial ceiling for shares during the pattern. For Ambev, that price ceiling to watch is up at $5.20.
Price momentum, measured by 14-day RSI, is the side-indicator to look at in Ambev. Our momentum gauge has made a series of higher lows during this stock's rounding bottom setup, a bullish divergence that indicates buyers are stepping in behind the scenes. Keep a close eye on Ambev. Shares are within grabbing distance of $5.20 as I write.
Mizuho Financial Group
The price action doesn't get much simpler than what we're seeing in shares of Japanese banking stock Mizuho Financial Group (MFG) . This bank has been bouncing its way higher in an uptrend since bottoming back in July -- and Mizuho is still a "buy the dips stock" this winter.
The uptrending channel in Mizuho Financial is formed by a pair of parallel trendlines that have identified the high-probability range for this stock to remain stuck within over the last six months. In a nutshell, every test of trendline support so far has provided buyers with a low-risk, high-reward opportunity to build a position. Now, as MFG moves off support for the fourth time, it makes sense to buy the latest bounce off of the bottom of the channel.
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 Mizuho can actually still catch a bid along that line before you put your money on shares.
If you decide to pull the trigger on Mizuho here, $3.50 is a logical place to park an initial protective stop.
New Gold
Gold bulls rejoice! After spending the last half-year correcting, metals prices look like they're finally getting ready for an up-move. And low-priced mining stock New Gold (NGD - Get Report) could be one of the most attractive ways to play that change in trend.
Like the rest of the mining industry, New Gold has been pointed lower since August. But now, a classic reversal setup is defining an important breakout level for shares. New Gold has been forming an inverse head and shoulders pattern, a price setup that indicates 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 New Gold's neckline at the $4 level.
Even though the price setup in New Gold isn't complete yet (shares haven't formed a right shoulder), any material push through $4 should be treated like a valid buy signal at this point. Like with any of the trades we've looked at today, it's critical to be reactionary and wait for the breakout to happen before pulling the trigger on this trade. New Gold doesn't become a high-probability reversal until shares clear $4.
Mining stock list
Thanks for the roundup!
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