foxex: Micro Scope

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, June 15, 2020

1. Stocks rebound towards more opportunity

2. Small company stocks on the rise

3. When everyone is ready for burgers this summer

Market Moves

The surprisingly strong selloff last week appears not to have deterred investors, but they waited until today to begin shopping for stocks to buy. The preference shown by investors is worth noting because they appear to favor micro cap stocks today. Though the benchmark S&P 500 index (SPX) closed nearly one percent above its Friday close, it didn't notch a new high—unlike the other equity asset classes.

The chart below compares State Street's S&P 500 index ETF (SPY) with its Midcap 400 index ETF (MDY) and iShares' Russell 2000 index ETF (IWM) and Russell Micro-Cap index ETF (IWC). The last of these (shown in the lower right panel), shows the strongest price pattern. IWC shares show a bullish engulfing candlestick pattern which also pushes significantly into the exhaustion gap previously reported. Traders may consider playing this gap expecting it be filled soon. Such an action would indicate that investors had gotten over last week's shock and thus stocks would be expected to rally. However that outcome doesn't always follow. Historically, such gaps are not filled and the gap thus completes a pattern called an island reversal--which is typically a bearish indication.

Small Company Stocks on the Rise
The chart below compares the Micro-Cap index ETF with five stocks today that (1) closed higher, (2) have been on an upward trend for the past month, (3) have a market capitalization of less than $300 million, (4) have a share price over five dollars, and (5) have made more revenue in the most recent quarter than they made in the last quarter. These stocks include Celldex Therapeutics (CLDX), Nautilus (NLS), Jumia Technologies (JMIA), Carroll Restaurant Group (TAST), and Century Casinos Management (CNTY). CLDX shares rallied strongly into the close surpassing a 300% gain in just the last three days. These are the kinds of opportunities every small-company investor hopes for, but these are comparatively rare.

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When Everyone is Ready for Burgers this Summer

Of the stocks above TAST may be worth a closer look. These shares belong to Carroll Restaurant Group, an investment company that owns and manages nearly 15% of all Burger King stores, over 400 Popeye's chicken franchises, and more. This company has rebounded strongly from the pandemic-driven lows, rallying from nearly one dollar a share. The good news is that the upside is probably still intact for this company because the economy still has a ways to go before fully rebounding and people are able to spend again the way they used to. As that process unfolds over the summer, it may spell opportunity for TAST shares to rally further.

The chart below details a Fibonacci channel projection that lines up with the former support price of around six dollars a share by the end of July. Such a diagram is no guarantee that shares will get to that price in the allotted time, but it does create an opportunity against which a trader or investor could compare risk.

The Bottom Line

Stock market indexes rallied off support to regain the levels they had fallen to last week. Investors heavily favored stocks in the Micro-Cap index. By itself this is often a bullish indication, however, if more buyers don't make the price action follow through, it could spell trouble ahead.