A broad selection of blue-chip and other widely held names have rallied to bull market and all-time highs in recent months, fueled by optimism for a business-pleasing tax cut. Small caps have struggled during this period, but a handful of these under-the-radar stocks are also engaged in fast-moving rallies that can reward well-timed positions. Let’s look at three of the hottest plays, focusing on levels that may offer substantial upside.

Of course, there’s a dark side to playing the momentum game because it’s often necessary to enter positions well above obvious support levels in hopes of selling even higher. This stairstep mechanism exposes less disciplined players to sudden and sizable losses, especially when a large public crowd has discovered the trade, making them vulnerable to stop running by predatory algorithms that feed on human mistakes and skill inadequacies.

AAOI

Applied Optoelectronics, Inc. (AAOI) just crossed the one billion dollar line in market capitalization, underpinned by a powerful rally that’s tripled the stock’s price so far in 2017. It joined the Nasdaq exchange in September 2013 at 10 and posted a new high at $28.01 in March 2014. The subsequent decline found support in single digits in the first quarter of 2015, ahead of a proportional bounce followed by a May 2016 test of the low.

Buyers emerged at that level, generating a double bottom and uptrend that set off a powerful momentum rally in January 2017. The uptick ran into a buzzsaw of selling pressure in March, giving way to a pullback that reached support at the 50-day EMA in April, ahead of an early May bounce that reached a new high about two weeks ago. The stock is now building a base in the lower-60s, with a rally above the red line having the potential to reach the 80s in a vertical buying wave.

CALA

Calithera Biosciences, Inc. (CALA) creates compounds that fight tumor growth. It has risen nearly 500% since that start of 2017, grinding higher in a momentum rally that could eventually reach the 2014 peak in the mid-30s. It posted that all-time high just three months after coming public at $9.40 and turned sharply lower through 2015, with sellers maintaining full control into the October 2016 all-time low at $2.20.

The stock turned higher after the election and lifted into resistance at the 200-day EMA at year’s end. A January breakout built a 3-week basing pattern on top of new support, giving way to a vertical advance that topped out at $14.90 in March. A 2-month rounded correction at the 50-day EMA has now reached the first-quarter high, with a breakout opening the momentum door to a fast rally into the lower-20s.

WTW

Weight Watchers International, Inc. (WTW) rose sharply after Oprah Winfrey announced a large stake in October 2015 and slumped through most of 2016 due to mediocre earnings results. Recent metrics have shown surprising growth, triggering a momentum rally that’s testing the post-Oprah high in the upper-20s. While this level marks resistance that could trigger a sizable reversal, the pullback could offer a low-risk entry ahead of even greater upside.

The stock topped out in the 80s in 2012 and sold off to a 2015 low at $3.67 just ahead of the news. The current rally is testing resistance from that downtrend, with a breakout into the 30s relieving overhead supply while favoring a strong advance into the mid-50s. Market timers wanting to establish pullback positions should keep a close watch on the green 200-day EMA at 20, with a basing pattern at or above that support level setting the stage for quick upside.

The Bottom Line

A selection of small stocks have erupted in 2017 momentum rallies, signaling strong buying interest due to a bullish story, improving metrics or a positive feedback loop, in which one set of shareholders gets rewarded, inducing the next group to come off the sidelines and take exposure, so they don’t miss out on the move.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>