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Consistently uncovering stocks that will outperform the market is no easy task. Many traders mistakenly go after low-priced stocks, buying a bunch of shares and hoping to make a big profit from a small move in dollar terms.
But a low share price is not the same thing as being undervalued. Cheap stocks are cheap for a reason, whether it be poor fundamentals or a broken chart. But when I find a low-priced stock with a promising chart pattern, I get excited at the prospect of outsized gains.
LendingClub (NYSE: LC), which operates an online peer-to-peer credit marketplace that connects borrowers and investors, jumped last week after reporting a lower-than-expected third-quarter loss and providing a positive outlook.
On the charts, this appears to be the sign of a major bottoming pattern and pending upside breakout. That is always good news, but for a stock like LendingClub, which has been a disaster since shortly after its December 2014 IPO, it is especially welcome.
Looking back, the stock plunged in what appeared to be a selling climax in May. After a 17-month decline, the huge one-day drop on exceptionally heavy volume told us that the final purge was at hand. The last of the bulls finally threw in the towel and the decks were cleared.
Of course, a selling climax doesn't mean a stock will immediately rally, but LC did start to grind higher. And thanks to its low share price, the percentage gain was huge. Since the May low, the stock is up about 85%.
We can now see what looks to be a significant basing pattern with a fairly solid upper border at $6.50, give or take a few cents. This line defined the final support to be broken in the bear market and now represents the final hurdle for the bulls before they can prove that they are back in control.
Adding to the bullish case is the small rally above both the key 50-day and 200-day moving averages. (I would like it better if the 50-day was above the 200-day, but this is a good start.)
Although many of my favorite technical indicators are not yet in line, I also don't see anything to refute the positive changes here. Plus, I like that the company is in the leading financial sector and that volume swelled on the post-earnings rally, when LC closed up more than 15%.
Chart watchers will also like that the Nov. 9 low "closed the gap" left on the chart on earnings day (Nov. 7). A gap is simply an area on the chart where supply and demand were so out of balance that price had to jump to restore equilibrium. Closing a gap is considered validation of the change in trend.
Any test or revisiting of a pre-breakout level that is touched only briefly before price shoots back up is indeed bullish. It tells us that bulls who missed the initial rally rushed in to take advantage of their second chance. What's more, volume on subsequent rally days was high, further indicating demand for shares.
Should LC break through the basing pattern's upper border around $6.50 and stay there for a day or two, it would have a clear shot at reaching resistance from March in the $9.75 area.
Because this is a low-priced stock, that move of $3 and some change would represent a 50% gain. That seems like a lot, but in the context of a stock that fell from a high above $29 to a low under $4, it's not unreasonable.
Is LendingClub a company that can disrupt the lending status quo? Maybe. But I'm only concerned with the chart, which is telling us the stock is on the verge of a major breakout. (Speaking of market disrupters, though, a former military intelligence analyst found a way to skim $850 a week from Wall Street. What she did was perfectly legal -- the money was just sitting there for the taking. Find out how she did it here.)
Recommended Trade Setup:
-- Buy LC above $6.53
-- Set stop-loss at $6
-- Set initial price target at $9.75 for a potential 49% gain in 10 weeks
Many investors hold strong opinions about the 200-day MA... but is it actually important?