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A Beaten-Down Biotech Stock Poised to Perk Up

Stocks in this article: PRAN

 DELAFIELD, Wis. (Stockpickr) -- The biotech sector is back in vogue today.

>>5 Hated Earnings Stocks You Should Love

This space has been under heavy selling pressure of late, but things are quickly turning around for the beaten-down biotech stocks. If you take a look at the performance of the iShares Nasdaq Biotechnology Index (IBB) today, you'll see that this major barometer of biotech equities is ripping to the upside by 3.4% to over $235 a share. This biotech ETF had recently dipped below its 200-day moving average, but it has now formed a V-shaped bottom chart pattern as it rips significantly higher above that key technical level.

This action is sweeping across the sector and has many small-cap biotech stocks catching a decent bid for the first time in awhile. This has prompted me to scan the small-cap biotech complex to look for names that are beaten down to extremely oversold levels that could easily see some sharp rips higher in the coming days or weeks. These rebound ideas could be great plays for large short-term gains for traders fast enough take advantage of the situation.

>>5 Stocks Under $10 Ready to Explode

One small-cap biotech stock that's been crushed of late is Prana Biotechnology (PRAN), which is engaged in developing therapeutic drugs designed to treat the underlying causes of degeneration of the brain and the eye as the aging process progresses, initially focusing on Alzheimers disease. This small-cap biotech stock is down huge so far in 2014, with shares off sharply by 71%. Shares of PRAN are down for good reason after the company recently announced that its experimental drug PBT2, which targets Alzheimer's disease, failed its phase II trials. The drug failed to improve cognitive function or to reduce amyloid plaques in patients.

The failed trail has now pushed shares of PRAN sharply lower, from its recent high of $11.59 to its 52-week low of $1.67 a share. That massive drop has now sent shares of PRAN into extremely oversold territory, since its current relative strength index reading is below 23. From a fundamental perspective, PRAN probably deserves to be down where it is, but from a technical perspective, this stock is looking ripe for a short-term rebound that could send shares screaming higher.

When a stock gets destroyed that much in a very short timeframe, traders need to put themselves into the minds of the shorts. Those short-sellers have banked big coin, and considering the technical situation of PRAN, it might be a great time for them to lock in some profits and buy the stock back for a rebound trade. Smart shorts know the market works in both directions, and if they really hate PRAN, they can look to short it again from higher levels instead of pressing their bets near 52-week lows.

>>Side-Step the Selling With These 5 Big Trades

Prana Biotechnology currently sports a short interest as a percentage of its float of around 10%. That means that out of the 38 million shares in the tradable float, 3.85 million shares are sold short by the bears. This is a big short interest on a stock with very low tradable float. If the shorts decide to start covering some of their bets and locking in profits, then this stock could easily spike sharply higher in the short-term.

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