Single-digit stocks have come alive in early 2019, underpinned by a Russell 2000 Index rally that has now carried nearly 25%. Even so, it takes special risk management skills to make money on these volatile issues because most are shaking off long-term downtrends, with weak or little profit growth. As a result, it is best to stick with the strongest plays, especially those hitting two- and three-year highs.

It's easy to locate these potential winners with a market scan that computes current positioning relative to the 200-day exponential moving average (EMA). Stocks that trade highest on this sorted list are outperforming their peers by a wide margin, making it easier to add to gains. Conversely, it's best to pass on issues that have undergone more than a single reverse split in their public history because those offerings severely dilute ownership.

Technical chart showing the share price performance of 3Pea International, Inc. (TPNL)

Nevada-based 3Pea International, Inc. (TPNL), formerly known as Paypad, offers prepaid transaction processing and cardholder enrollment services. It came public in the over-the-counter (OTC) market, a.k.a. pink sheets, at nine cents in 2008, while liquidity surged in July 2018 after the stock lifted off a small basing pattern above $2.50. It has more than tripled in price in the past six months, reaching an all-time high at $8.00 last week.

A rally above that level could develop rapid upside, lifting this small-cap leader into round number resistance at $10.00. On the flip side, a reversal and downturn should hold above the midpoint of the Feb. 7 wide range rally bar, with a decline just below $6.00 offering a potential pullback buying opportunity. Average volume has now exceeded 400,000 shares per day, but the stock continues to trade with a relatively wide spread, so it makes sense to use limit orders for trade execution.

Technical chart showing the share price performance of Zix Corporation (ZIXI)

Zix Corporation (ZIXI) provides e-mail encryption and device security services for the health care industry from its Dallas headquarters. The stock fell to an all-time low at 51 cents in 2006 and turned higher, topping out at $6.24 in December 2007. It posted a higher low at 88 cents following the 2008 economic collapse and stair-stepped higher in a shallow pattern that finally completed an 11-year round trip into the prior high in May 2017.

A pullback into February 2018 printed the seventh higher low of the decade, ahead of a February 2019 breakout that has now reached a 14-year high at $8.60. The stock has gone straight up since the Jan. 15 low at $5.34, posting an unsustainable 61% rally, predicting that it will soon turn lower to shake out weak hands. A pullback that settles near new support at $6.50 could offer a low-risk buying opportunity, ahead of a secondary rally impulse that reaches the double digits.

Technical chart showing the share price performance of Camtek Ltd. (CAMT)

Israel's Camtek Ltd. (CAMT) designs and sells measuring equipment for the semiconductor industry. The company came public near $6.00 in August 2000 and posted an all-time high at $11.50 just one month later, ahead of a steep decline that ended at 31 cents in 2003. Higher lows in 2009 and 2013 preceded upticks that stalled well under the prior high, while a 2016 higher low generated a bounce that reached within 39 cent of resistance in August 2018.

The stock nearly got cut in half into December, finding support at $6.29, ahead of a recovery wave that is now trading about two points under the 2018 high. Accumulation has risen back to 2018 levels, raising the odds for a final buying surge that reaches resistance ahead of a multi-decade breakout into the upper teens. However, patience is needed with this play because it has just crossed the 200-day EMA for the sixth time in four months, predicting continued basing action around the $7.50 level before directional momentum takes hold.

The Bottom Line

Single-digit stocks are exhibiting unusual first quarter strength, predicting continued upside as long as the market-leading Russell 2000 small-cap index keeps adding points.

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