The biotech industry group currently ranks at a lofty No. 27 out of 197 industry groups for six-month relative price performance. But that high standing also masks some weakness among some of its former big stars. Regeneron Pharmaceuticals (REGN) is a case in point.
From November 2015 to the first half of 2017, Regeneron formed a giant first-stage base. It was first stage because in January 2016 the stock undercut the 435.52 low of a prior cup with handle, thus resetting the base count.
This is a key point, because in addition to the head and shoulders, poor action after the breakout from a late-stage base offers the best entry point to sell short. So, why consider Regeneron? Shares had such a monster run since bottoming at 15.02 in 2009, rising more than 3,900% off that low. That's unusual.
Regeneron broke out of its giant base at 489.10 on June 20, 2017, posting three impressive up days in a row in heavy volume. Then the rally fizzled. The breakout wound up with an 11% advance at the rally's peak of 543.55. Then it fell 8% below the buy point to around 450. Given the stock's big long-term move since 2009, the new breakdown offered an initial short-sale entry.
Regeneron rebounded a bit, getting to 477 briefly on Oct. 5. But a short seller at 450 was never forced to cut losses at 8%.
As seen in a weekly chart, Regeneron offered a second chance to sell short in the week ended Oct. 13; the stock got rejected at the 10-week moving average near 463. On Monday, the stock was turning lower after again trying to clear the 10-week moving average last week near 387.
Volume shot higher initially on Monday. In afternoon trading, turnover was running 10% above usual levels. Regeneron's 50-day average volume is 845,000 shares.
A short sale at 387 would mean that you must cut the loss at 8% and cover the position by buying back shares near 417. Also keep in mind that in a confirmed uptrend, most short sales have a bigger risk of failure. A breakdown below the recent low of 353.14 would affirm the stock's downtrend. The stock exhibited support around 325 to 350 in 2016 and 2017, so investors should watch that. A 20% profit target means you should cover at 322.50.
The Tarrytown, N.Y., firm pulled off some very nice quarters of rising earnings per share (up 36%, 22%, 48% and 27% in the past four quarters) and revenue (up 10% to 23%). And analysts see fourth-quarter earnings jumping a very impressive 48% to $4.49 a share. But in full-year 2018, earnings growth is expected to slow sharply, up just 9% to $16.95 a share. Remember that annual estimates can be conservative.
Celgene (CELG), another biotech, continues to struggle after if fell like a rock in October. The stock has been moving in a somewhat sideways manner after sinking more than 35% in less than four weeks. The current action is beginning to resemble that of an L-shaped pattern.
For now, Celgene is trying to climb back above the 10-week moving average, which has started to bottom out after falling for months.
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