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A Beaten-Down Biotech Stock Poised for an Epic Short Squeeze

Wall Street likely overreacted to the poor vintafolide results for ovarian cancer, since the stock has collapsed from over $17.50 to its recent 52-week low of $6.01 a share. That collapse pushed shares of ECYT into extremely oversold territory, since the stock traded at a relative strength index reading of well below 30 for over a month. That overreaction was a major win for the short-sellers, but those shorts might want to think about locking in profits and getting long this stock now, since it's technically changing its tone from bearish to bullish rapidly.

If you take a look at the chart for ECYT, you'll notice that this stock recently formed a double bottom chart pattern at $6.01 to $6.05 a share. Following that bottom, shares of ECYT have started to uptrend and break out above some near-term overhead resistance levels at $6.62 to $6.82 a share. That breakout is now setting up shares of ECYT to trigger a much bigger breakout that could give this stock a chance to make an explosive move back into its previous gap-down-day zone from early May that started above $17.50 a share.

Traders should now look for a long-biased trades in ECYT as long as it's trending above those double-bottom support levels at $6.01 to $6.05 a share and then once it breaks out above some key near-term overhead resistance at $7.34 a share with high volume. Look for a sustained move or close above that level with volume that hits near or above its three-month average action of 1.93 million shares. If that breakout materializes soon, then ECYT will set up to re-fill some of its previous gap-down-day zone from May that started just above $17.50 a share. Some possible upside targets if ECYT gets into that gap with strong upside volume flows are $10 to $12 a share.

If ECYT breaks out into that gap with volume, then this stock could see an epic short-squeeze that sends shares screaming sharply higher. The current short interest as a percentage of the float for ECYT is extremely high at 16.8%. That means that out of the 36.96 million shares in the tradable float, 6.24 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. It won't take much to send this stock ripping higher, so watch for that breakout with volume to potential ignite the next big biotech short-squeeze.

-- Written by Roberto Pedone in Delafield, Wis.

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At the time of publication, author had no positions in stocks mentioned. Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.
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