3 Small-Cap Stocks to Trade as They Rise From the Ashes

Small-cap stocks have turned from laggards to leaders…

This story was originally published here.

On the surface, Thursday seemed like any other session when profit-taking strikes. The S&P 500 and Nasdaq took well-deserved breathers, declining 0.61% and 1.09%, respectively. But if you look closer, you’ll see an important theme. While leaders lagged, laggards led. Instead of indiscriminate selling taking everything lower, we saw rotation out of large-caps and into small-cap stocks.

This is a bullish omen signaling a broadening of the market recovery. Small-cap stocks have long underperformed. They were hit hardest during March’s massacre, ultimately falling 44%. And, they’ve been the slowest to rise. But not this week! Wall Street’s go-to fund for tracking the little guys, the iShares Russell 2000 ETF (NYSEARCA:IWM), is up 7.3% so far on the week. By comparison, the S&P 500 is only up 3%. That’s a substantial discrepancy.

While some small-caps have yet to crawl out of the dumpster, others are finally breaching resistance and turning their daily trends higher. Here are three of my favorite.

Let’s take a closer look at the price levels to watch and how to trade these small-cap stocks moving forward.

Small-Cap Stocks to Trade: Bed Bath and Beyond (BBBY)

Small-Cap Stocks to Trade: Bed Bath and Beyond (BBBY) stockSource: The thinkorswim® platform from TD Ameritrade

Brick and mortar retailers have been under siege from Amazon (NASDAQ:AMZN) for years now. Bed Bath and Beyond is a shell of its former self, and the wholesale destruction of its once lofty share price has been hard to watch. The global pandemic only accelerated the downward spiral, ultimately driving BBBY stock to $3.43 before sellers were sated.

Since then, however, we’ve seen a constructive bottoming formation put in. And, it’s compelling enough to warrant bullish trade ideas. The price action has taken on the form of both a cup-and-handle and an ascending triangle. Volume patterns have weighed in favor of buyers for the past month. Thursday’s 14% moonshot saw over 20 million shares traded, suggesting big buyers were wading in. BBBY stock has now double off the lows and looks primed to take out overhead resistance at $7.

If it does, a run to $10 could be in the cards. In case the breakout bid fails, I’d stop out on a push below support at $5.78.

Editor's Note: For the rest of the stocks, click here.

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