One of the most exciting technical events is when a prolonged downtrend line is broken to the upside. 

First, this technical behavior signals a reversal in trader expectations from negative to positive. In other words, bulls are now swimming with the tide instead of against it.

Second, if you buy the stock close to the trendline break, you are usually getting in on the cheap. The appreciation potential can be huge as the stock recovers and challenges previous resistance levels. While you may need to be patient as this resistance is encountered, the risk of trading the downtrend line break is limited… and the reward can be significant.

That is what we’re seeing with small-cap iRobot (Nasdaq: IRBT), which just broke an almost two-year-long downtrend. 

iRobot was founded in 1990 by three MIT roboticists and went public in late 2005. It operates in two divisions: home products and defense and security.

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The company’s most popular product is Roomba, a vacuum cleaner robot. Roomba has sensors that allow it to map and adapt to your home while proprietary technology allows it is keep track of where it has already cleaned.

Roomba is already in millions of homes and accounts for roughly 90% of iRobot’s revenues. It commands approximately 68% of the robotic vacuuming market, while the nearest competitor, Samsung, only has 6% of the market.

In addition to Roomba, Scooba is marketed to mop hard floors. Mirra is a robotic cleaner of swimming pools and Looj cleans gutters with the help of a remote control.

The company is also developing a robotic lawn mowing system — a category that’s currently a $200 million market in Europe. IRBT has already received permission from the FCC to use wireless beacons, which would establish a property’s boundaries and be key for a robotic grass cutting system to work. 

IRBT estimates domestic sales of its products will grow nearly 20% this year to $225 million, while international sales are expected to increase about 4% to $332 million. 

One product the company feels will take off in the Chinese market is floor mopping robot Scooba. The company estimates it will have 70% revenue growth between 2014 and 2015 in China thanks in part to this product.

In addition to home robots, IRBT markets four products for the military and police forces. They vary in size and do things like acting as the eyes and ears of military forces attacking a building and detecting and disposing of bombs.

In the third quarter, revenues were flat at $143.6 million, falling short of the $145.6 million analysts expected. Earnings per share (EPS) fell 12.5% year over year to $0.42; however, this was well ahead of the $0.30 consensus estimate. 

For the full year, analysts expect EPS to grow 11% to $1.29 on a nearly 10% increase in revenue to $612 million. Earning growth is forecasted to ramp up next year, jumping 17% to $1.63 on a 14% increase in sales to $698 million. 

While solid revenue and earnings growth should propel the stock higher, the company is also under pressure from activist investor Red Mountain Capital Partners, which has helped light a fire under the shares.

Red Mountain bought 1.5 million shares in April 2015 and recently increased its stake to 1.78 million shares which is about 6.1% of shares outstanding. They are pressuring the company to unlock shareholder value through measures such as share repurchases, instituting a regular dividend and the potential sale of the defense and security business. 

It’s worth noting that iRobot already has a $50 million share repurchase program, of which it has spent $27 million, and that it expects to buy back another 1 million shares in 2016, which at current prices would be worth about $36 million.

Turning to the chart, we see IRBT’s break from an almost two-year-long downtrend that began in February 2014 at roughly $47.

The stock then made a series of lower highs and lower lows — the very definition of a downtrend. 

It hit a low near $28 in February of this year, recovering to about $35 in March. Shares then moved sideways before gradually falling into the late-August low when they marginally broke support, hitting a low in the mid-$27 range. From there, an uptrend line can be drawn. 

In mid-November, IRBT formed a symmetrical triangle and broke out. Last week, it took out key resistance near $35 and hit a new 52-week high just below $38 before it was caught up in broader market selling.

There are two key levels of resistance where we would expect shares to consolidate. The first is $38, which is the recovery peak from November 2014. The second is $42, where shares failed in June 2014. I am setting my target just below that level at $41.95.

An accelerated trendline currently intersects the chart just above $32, so we will set our stop-loss at $31.95.

Recommended Trade Setup:

— Buy IRBT at the market price
— Set stop-loss at $31.95
— Set price target at $41.95 for a potential 17% gain by Q2 2016

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This article was originally published on ProfitableTrading.com: Small Cap’s Breakout Could be the Start of a Huge Run​