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The segment of the market that is referred to as the micro caps comprises companies that have a market capitalization of roughly $50 million to $300 million. These companies tend to be underfollowed by institutional investors due to their relatively small size and limited amount of research that is usually available.
Other factors such as stock price and liquidity also come into play for larger investors who have fairly tight governance policies for determining asset allocation. Based on the charts discussed below, it appears as though now could be an interesting time for average traders to look to micro caps and consider adding to their exposure over the coming weeks or months.
iShares Micro-Cap ETF (IWC)
Retail traders who are interested in adding exposure to a specific set of factors such as market capitalization often turn to exchange-traded funds such as the iShares Micro-Cap ETF (IWC). As you can see below, the price has recently fallen toward the support of its 50-day moving average and looks poised to make a bounce higher.
It is interesting for traders to note how the break above the 200-day moving average in November and subsequent move higher has triggered a bullish crossover between the 50-day moving average and 200-day moving average (shown by the blue circle). This bullish crossover is a common long-term buy signal and is known to many as the golden cross. It is often used to mark the beginning of a major uptrend. Recent price action near the support of the 50-day moving average confirms that the bulls are in control of the trend, and the recent pullback could be providing traders with a timely opportunity to enter a position with a reasonable risk-to-reward setup.
Onto Innovation Inc. (ONTO)
Traders who are looking for candidates to add to their portfolios often turn to the top holdings of popular funds such as IWC. One such name that could be worth a closer look is Onto Innovation Inc. (ONTO). As you can see from the chart below, the price has recently moved above a key level of resistance near $36.
Bullish momentum over the past several months has forced the long-term moving averages to tilt upward, which will be used by followers of technical analysis to suggest that a long-term uptrend could just be getting underway. From a risk-management perspective, traders will most likely maintain a bullish outlook on the stock while placing stop-loss orders below $35.63 or $32.89 to protect against a sudden shift in fundamentals.
Dicerna Pharmaceuticals, Inc. (DRNA)
Another holding of the IWC ETF that could be worth a closer look by those who are considering buying into the micro-cap space is Dicerna Pharmaceuticals, Inc. (DRNA). As you can see from the chart, the price broke beyond the resistance of an ascending triangle pattern in late 2019 and has since given back some of the gain in a move toward the support of the 200-day moving average.
Active traders will most likely look to open a position as close to the 200-day moving average as possible in hopes of maximizing the risk/reward and capturing a sizeable bounce back toward the December high near $28.
The Bottom Line
Micro-cap and small-cap investing has fallen out of fashion with many investors in recent months in favor of larger well-known companies. Based on the charts discussed above, it appears as though defined risk-to-reward scenarios are putting the mico- and small-cap segments back in focus and could be presenting a lucrative buying opportunity.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.
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