Another under-$10 name in the biotechnology and drugs complex that looks ready to trigger a major breakout trade is DepoMed (DEPO - Get Report), a specialty pharmaceutical company initially focused on neurology, pain and other diseases of the central nervous system. This stock is off to a decent start so far in 2012, with shares up over 8%.
If you take a look at the chart for DepoMed, you'll see that this stock was whacked by the bears back in late April, with shares dropping from a high of $6.64 to a recent low of $4.75 a share. During that downtrend, shares of DEPO were consistently making lower highs and lower lows, which is bearish technical price action. That said, DEPO has started to rebound sharply since hitting that $4.75 low, with the stock now making higher lows and setting up for higher highs. Shares of DEPO have now moved into position to trigger a major near-term breakout trade.
Traders should now look for long-biased trades in DEPO if it can manage to trigger a break out above some near-term overhead resistance at $5.75 to $5.86 a share with high volume. Look for volume off a sustained move or close above those levels that hits near or above its three-month average action of 360,300 shares. If that breakout triggers soon, then DEPO could easily re-test and possibly take out its next major overheard resistance levels at $6.64 to $6.70 a share, or possibly even $7.15 a share.If you like the setup here for DEPO, then one could get long off any weakness and simply use a stop just below its 50-day at $5.38 a share, or even right below $5.25 a share. One could also wait for strength and buy once DEPO takes out $5.75 to $5.86 with heavy volume, and then just use a stop right below its 50-day moving average of $5.38 a share. This is another favorite name among the bears, since the current short interest as a percentage of the float for DEPO is high at 7.1%. If that breakout triggers soon, then we should see a solid short-covering rally materialize for DEPO.