Trading the Biotechnical Way
The biotech sector, perhaps more than any other market subgroup, is renowned for its potential for huge single-day gains and monumental blow-ups that can obliterate a market cap in a matter of hours.
Drug trial results, rulings from the Food and Drug Administration or opinions from advisory committees can send a stock soaring or plummeting. A recent example was the 45% haircut on Tuesday in Adolor (ADLR) after it released disappointing late-stage study data.
Then there's Genta (GNTA), whose stock, already a shadow of its former self, closed Aug. 31 at $1.52.
A week later two-thirds of that's gone. The catalyst was an adverse ruling from an FDA advisory panel that voted not to recommend approval of its drug Genasense for treating a type of leukemia.Clearly the risks can be tremendous, and the rewards can be equally so, but you don't have to rely solely on fundamentals and breaking headlines for making trading decisions. As with other sectors, evaluating the technicals in the biotechs in order to understand the general direction of the group and individual stocks can tilt the odds in your favor. The chart of the Amex Biotechnology index caught my eye recently when it broke out of a recent base. However, as Philip Roth, chief technical market analyst for Miller Tabak + Co. points out, the breakout came on low volume, making it "suspicious." He expects it to fail and considers a close under 650 confirmation of that failure. Jeffrey Spotts, portfolio manager for Prophecy Asset Management, doesn't think the recent action in the group has been sector-specific. "It's been moving with the market," he says. Since the recent lows on June 14, the S&P 500 has gained 7.2%. The Amex Biotech index climbed 4.9%, but it's up 8.1% since hitting its lows a few weeks before the S&P. Though biotech can be difficult to game for technicians because of the wild swings, Spotts can see why institutional managers are attracted to the sector.
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