I actively follow around 100 small-cap companies with the intention of identifying investment opportunities to exploit. The advantage of having an in-depth understanding of such a large number of companies is that there is always newsflow emerging which, in the under-researched small-cap space, is not always accurately reflected in market pricing, a point I commented on last week (‘Bargain shares: Exploiting information voids’, 5 July 2021).
Furthermore, even when share prices run up to my target prices and beyond on positive newsflow, profit-taking will always ensue at some point as is the nature of stock markets. However, this presents further investment opportunities to take advantage of. Invariably the share price pullback in a bull trend will try to retest a previous resistance level/share price high, the reaction to which can be informative. That’s because profit-takers will also be monitoring the pullback with a view to buying back into the stock. This explains why share prices can rally hard after bottoming out.
A good example is technology group Xaar which has pulled back from the June high (230p) to test the December 2020 high (183p). It looks primed to resume the uptrend, as does Mpac, a niche packaging engineering group.