This Algae Stock Could Jump 60% : CYAN

By Dr. Michael J. Carr

Many of the market's biggest winners shared basic characteristics when they started their bull runs: Market caps under $100 million, a record of sales and earnings growth over the past several years and a strong performance in the market.

That's exactly the kind of company I've found this week... It's also one of the most interesting I've ever researched.

The company is a world leader in microalgae technology. It specializes in marketing algae-based nutritional products. But that's just the beginning. It's also an expert in cultivating and harvesting algae on a commercial scale. The crop could easily be adapted for energy use. That's why shares jumped almost 13% in the week after President Obama announced that algae based fuels could replace up to 17% of the oil we import for transportation.

It has a market cap is about $45 million and it has been increasing sales and earnings for the past three years. In fact, earnings grew more than 11,000% over the past twelve months. That's just one of the reasons why shares have outperformed 94% of stocks over the past six months. Despite delivering big gains to investors, it is still priced attractively at a price-to-earnings (P/E) ratio under 14 and a price-to-sales (P/S) ratio under 2.

My trading system is also telling me that Cyanotech (CYAN) is in "buy mode" right now.

I use a 26-week rate of change (ROC) indicator to spot the strongest stocks and ETFs. A number of studies have shown that the biggest winners of the past six months are very likely to continue their winning ways in the future. Looking at charts of the biggest winners of all time confirms that this strategy works.

CYAN is up nearly 500% since bottoming in July 2010. It's been on the market leaders list since December of that year, and it looks like it still has some big gains to offer traders.

Market moves tend to have some degree of symmetry and this symmetry allows traders to find price targets from patterns. From peak to trough in the bear market, CYAN fell by $4.35 (from $5.75 in January 2010 to $1.40 in July 2010). The amount of that fall can be added to the peak to find targets. Traders often use multiples of Fibonacci numbers to find additional targets. Fibonacci numbers are widely followed by traders and are defined by a series of numbers that has been widely studied by mathematicians. To find price targets, a price move can be multiplied by 1.618, the most commonly used Fibonacci numbers.

For CYAN, the price target using 1.618 times the 2010 move is equal to $12.79. A smaller pattern CYAN formed in the first weeks of 2012 offers a price target of $12.80. The clustering of price targets is usually a better signal than any individual target.

The pattern formed earlier this year also offers a potential stop level of about $7.50, limiting the risk on the trade. This is a short-term support level that marked the retracement low which followed the 13% jump after the President's energy policy speech. That means this trade has less than 6% downside (using the stop-loss) and 60% upside potential.

The ROC indicator for CYAN is strong, but far from oversold. Previous price moves in this stock have stalled when ROC reached the upper Bollinger Band, shown as a red line in the chart above. Bollinger Bands can be added to any indicator to highlight overbought and oversold extremes. This indicator shows that CYAN's price could move significantly higher without becoming overbought.

The portfolio for my 26-week ROC strategy is unchanged this week and we will continue holding Vanguard REIT (VNQ), SPDR S&P 500 ETF (SPY) and Vanguard Small-Cap ETF (VB).