The dominant theme in the market this month has been the outperformance of big stocks and underperformance of small-cap stocks. While the S&P 500 Index, representing highly capitalized companies, refuses to stray far from its all-time highs, the Russell 2000 index of small caps remains in a downtrend.
IRobot (Nasdaq: IRBT) is one such stock. The company is best known by consumers for its Roomba vacuum cleaner, but it also manufactures robots for defense and security, telemedicine and video collaboration.
As was the case with many small-cap stocks, IRBT peaked in early March. After touching a high of $48.36 on March 6, it started a painful slide to a low of $30.11 last Tuesday -- a 38% loss in just 11 weeks.
But technically, conditions have changed for the better.
The first step to reversing a long slide is simply to stop falling. On the charts, we expect to see support levels doing their job, and for IRBT that is what happened. Support from the December gap between $31.50 and $33 held. The daily charts show a small bullish reversal at the bottom of that range on Tuesday with a respectable level of volume.
Bringing that out to the weekly time frame -- and assuming the stock finishes the week on a high note -- we can see a weekly reversal forming, as well.
From a momentum point of view back on the daily chart, there was also a bullish divergence between price action and the Moving Average Convergence/Divergence (MACD) indicator. MACD made a higher low in May versus its April low as price made a lower low. It suggests that downside momentum is waning, and that is a second condition for an upside reversal.
Next, the stock is trading above its 21-day moving average for the first time since early April. As you can see, we are slowly assembling technical evidence that the bulls are taking back the controls. The 21-day average is rather short term, and we do not yet have a move above the more significant 50-day average, which is a negative.
But there is still more on the positive side of the ledger. IRBT is now trading above the top of its support zone and above at least one trendline that defined the recent price decline.
Recognia, a system that automatically finds technical setups, defined the March-May decline as a falling wedge with bullish implications. It projects a 42% gain over the next six to nine weeks, and while I would not rely solely on a pattern recognizer and forecaster, it does suggest we should consider taking a bullish stance here.
Finally, from the sentiment arena, StockTwits, a social media website for traders, reports a bullish tone for the stock. Its users were 90% bullish, which suggests many active traders are also following the stock and see reasons to like it. From my own experience, such a high reading is not excessive on this particular site.
As they say, it is a market of stocks, and even if we have a bearish view of the broader market we have to take individual stocks on their own merits. IRBT seems to have plenty of merit.
This article was originally published at ProfitableTrading.com:
Small Cap's Bullish Reversal Could Deliver Double-Digit Profits