The first quarter rally has stalled in the past week while market players await the final outcome of U.S.-China trade talks, but a basket of small-cap leaders continues to post new highs. This makes sense, given the growing risk appetite following a 2018 decline that threatened to upend the decade-long bull market. However, positive small-cap seasonality will dissipate in two months, giving way to a mid-year environment that often punishes small speculative issues.

As a result, it makes sense to make hay while the sun shines, pressing positions while engaging in aggressive risk management and profit taking. This process works best when the technician identifies potential barriers before trade entry, uses trailing stops after entry and takes profits without hesitation when price action reaches those levels. Of course, this takes discipline because rising prices can induce absentmindedness that ignores major warning signs.

These small-cap leaders have risen to the top of the Russell 2000 performance list as calculated by relative positioning above the 200-day exponential moving average (EMA). That also means these stocks are probably overbought and setting off contrary signals, adding another reason that aggressive trade management is needed to book profits. Stochastics signals are particularly useful when dealing with this scenario, watching for bearish crossovers that can precede downturns.

Technical chart showing the share price performance of Lattice Semiconductor Corporation (LSCC)
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Lattice Semiconductor Corporation (LSCC) sells programmable logic and other semiconductor devices in Asia, Europe and the Americas. A multi-year uptrend posted an all-time high at $41.69 in 2000, while a multi-year downtrend hit $1.04 during the 2008 economic collapse. The stock bounced to $7.38 in 2011, marking resistance ahead of a 2014 breakout that failed at $9.19. Rally attempts in 2016 and 2018 also failed, but last month's buying spike finally cleared that level, lifting into the double digits for the first time since 2004.

A descending triangle breakdown in 2002 established strong resistance near $17, while that level now marks the .382 Fibonacci retracement level of the eight-year downtrend, denoting a potential upside target for the current advance. The rally is now approaching interim resistance at the 2004 high above $13, raising the odds for a pullback that could reach the 50-day EMA near $10. In turn, that price zone could offer a low-risk buying opportunity.

Technical chart showing the share price performance of iRobot Corporation (IRBT)
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iRobot Corporation (IRBT) makes self-driving appliances for home and business. It came public at $29.51 in November 2005 and topped out above $37 just three sessions later. That level marked resistance for a decade, denying breakout attempts in 2011, 2012, 2013 and 2014. The stock finally broke out ahead of the 2016 election, surging to $109.40 in July 2017, and it pulled back into the mid-$50s during the second and third quarters of 2018.

The stock completed a round trip into the 2017 high in September and eased into a sideways pattern that completed the handle of a cup and handle pattern, ahead of a February 2019 breakout that is now generating upside momentum. The rally is trading at an all-time high, while the depth of the cup and handle forecasts a healthy price target above $160. Accumulation has reached an all-time high as well, generating a strong tailwind that should underpin gains.

Technical chart showing the share price performance of Array BioPharma Inc. (ARRY)
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Array BioPharma Inc. (ARRY) develops and markets small molecule drugs used in the treatment of cancer, heart disease and other conditions. A rally into 2002 stalled in the mid-teens, marking resistance ahead of a failed 2007 breakout attempt. The stock fell to an all-time low at $1.58 in 2011 and turned higher, returning to resistance for the second time in February 2018. It finally cleared that barrier last month and is now trading at an all-time high.

The on-balance volume (OBV) accumulation-distribution indicator has lifted to an all-time high with price, raising the odds for strong returns in the coming months. The rally paused for a few days in the low $20s and is now probing a new high, indicating a potential rally thrust into the upper $20s. A trailing stop should work well with this price structure, while a pullback to the 50-day EMA near $20 could offer a lower-risk buying opportunity.

The Bottom Line

Small-cap leaders continue to post new highs, despite waning momentum in broad market indices.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.