foxex: Small Cap Stocks Show Stealth Buying Pattern

Friday, August 30, 2019

Small Cap Stocks Show Stealth Buying Pattern

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, August 30, 2019

1. Small Cap Stocks Technically Attractive

2. Leading Small Cap Stocks Show Impressive Runs

3. Haemonetics Stock Chart Flashes Post-Earnings Setup

Market Moves

Investors may have expected Friday to end with good news, and in some ways it did, but not in the way they were hoping for. Indexes closed nearly flat for the day after gapping higher at the open. Some investors sold off at the start as markets drifted lower in the early hours of the session, but by midday they had rebounded off their lows.

Small cap stocks closed the week off leaving an interesting pattern which suggests some investors are quietly snapping up this asset class. Taking a look at the chart of the ETF that tracks the Russell 2000 small cap index (ticker symbol IWM), it appears that the RSI indicator is showing a bullish divergence from the price action. When such a signal occurs it implies that conditions might be right for the asset to trend higher in price (see chart below).

Leading Small Cap Stocks Show Impressive Runs

If the small cap stocks in the Russell 2000 index do represent a good buy, then shrewd investors might want to go looking for the best stocks in that group to consider. One very simple method for finding good stocks to consider for investing is to look for relative strength. This means stocks which have already moved higher in price at a pace faster than their benchmark (in this case, faster than IWM).

The four most heavily represented stocks in the index tracked by IWM, are as follows: Novocure Limted (NVCR), Haemonetics (HAE), Science Application International (SAIC), and Portland General Electric (POR). These stocks have also outperformed their index over the past three months and would likely continue to rise if buyers began finding small cap stocks more attractive (see chart below).

Read more:

FAANG Stocks Could Reward Dip Buyers

Airline Stocks Set to Rise this Fall

Dollar Discount Stores Trading Higher After Earnings

Haemonetics Stock Chart Flashes Post-Earnings Setup

The chart pattern shown below is unique to Haemonetics shares (HAE), but investors have a way of displaying their collective reaction to a company's news and performance. In this chart HAE shares have twice shown the tendency to surge after good news reported in company earnings, however the share price begins to languish in the last two quarters. Three months ago this pullback represented an excellent entry point for investors, as shares surged higher over the following two months.

It may be expecting lightning to strike twice, however it seems a good bet that if the Russell 2000 index moves higher in the days to come, HAE shares will likely rise to a greater degree.

The Bottom Line

U.S. stock indexes opened higher but slumped in early trading, finding support and ultimately closing only slightly lower than the previous day's close. Small cap stocks seem to be showing a bullish divergence with technical indicators. The leading stocks in the Russell 2000 might make for good performance if investors decide to favor higher-risk assets in the near future.

How can we improve the new Chart Advisor? Tell us at chartadvisor@investopedia.com