Short Trader: Neurochem Bulls Feel the Pain

Editor's note: Formerly, Chris Schumacher's short trading ideas were available only to subscribers to TheStreet.com's Short Advisor. Now these picks are being offered to RealMoney.com and TheStreet.com readers.

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Biopharmaceutical company Neurochem(NRMX Quote) has hit the bears' radar screen because of the continuing bearish technical formation of a head-and-shoulders pattern.

The company develops drugs primarily for the treatment of neurological diseases, including Alzheimer's.

The main risk inherent in drug companies is Food and Drug Administration approval of the drugs in their pipeline. News of an approval or rejection can move the stock price in either direction in a fast and vertical fashion. Therefore, I would recommend using less capital to lower your risk in a setup such as this one.

Neurochem's head-and-shoulders pattern has formed in the price range of $15 to $20 a share, with the right side of the shoulder forming in a tighter range of $15 to $18.75. The right side of the shoulder is also forming a downtrend within the range.

The company reported earnings last week, but the shares did not react much to the news. With the stock forming the right side of the shoulder and little buy-side momentum over the past two months, the shares have a higher probability of declining to new lows.

The ideal entry for this setup would be at $17.50, with a stop at $20. This offers $2.50 in risk.

The first profit target should be placed at $15 to satisfy the 1-to-1 reward/risk ratio. The second profit target should be placed at $12.50, where full profits could be taken.

If the price of the stock should close under $15 without first offering an entry, this trade setup is no longer valid.

Shares of Neurochem closed at $16.29 Monday.

Neurochem (NRMX) -- Daily