Short Trader: Savient Bulls Take Their Medicine

Exhaustion overtakes buyers.
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Savient Pharmaceuticals

(SVNT)

, a specialty pharmaceutical company that develops, manufactures and markets a number of different drugs, has hit the bears' radar screens because of a bearish technical formation.

Two of the company's main drugs are Oxandrin and Puricase. Oxandrin is used to promote weight gain following involuntary weight loss related to medical conditions, and Puricase is used to control hyperuricemia (a high level of uric acid in the blood) in patients with symptomatic gout.

Savient is currently seeking phase III approval for Puricase, which adds risk to a short position in this stock. With most biotech and pharmaceutical companies, any approval of phase III clinical trials tends to lead to a gap up in stock price. Therefore, while the short-term technical view could prove to be a bearish signal, the day-to-day risk of getting phase III approval could increase the share price beyond the initial risk parameter. Building a position with less capital risk would be essential in this technical setup.

For the past year, Savient's share price has moved in a very strong fashion from $6 to almost $16. The stock has displayed at least two phases of accumulation. (These types of phases are described in greater detail in my book,

Techniques of Tape Reading

.) The first phase of accumulation is characterized by price moving slightly higher but on very low volume. This stage typically allows institutions to build huge positions without attracting attention.

The second stage of accumulation pushes price higher to such a degree that more traders and investors begin to notice it. Average daily volume begins to increase, attracting more attention.

Finally, the third phase is marked by a decidedly large increase in volume, and price then reaches a resistance level. In January, there was such a volume spike on the buy side in Savient, which coincided with a large spike in price to nearly $16.

The combination of a high-volume day with vertical price movement typically leads to exhaustion, and price begins to move lower again. Exhaustion sets in because all of the late-to-the-party buyers get in at the last phase, leaving few left to buy. Those late buyers are usually the first to sell as price moves lower and they realize they just bought third-phase accumulation -- which is typically the last stage of buying for a while. You can see evidence of this action in Savient's daily chart below.

Fast-forward to today and you can see how the old adage of "what was resistance should now be support" applies to this stock. Beginning in November 2006, $12 was a solid resistance level that, once broken, led to the strong move up to just under $16. As price retested this former resistance in February, the level held and became support.

The retest in March also held this level again, but volume now declined as price moved higher. This shows less enthusiasm for this support on the retest. A break of $12 on a closing basis should yield additional lows.

Savient Pharmaceuticals (SVNT) -- Daily

The ideal setup for a short trade in Savient is to see the price close below $12 to confirm the break of support. Then the stock needs to trade back up to $12, where entry would be taken. Shares closed at $12.30 Monday.

Once the trade is entered, the stop would be placed at $13, offering $1 in risk. The first price target would be placed at $11, with a final profit target at $10.

If the price of the stock closes under $12 and then moves under $11.50 without first offering an entry, this trade setup is no longer valid. Also, if the price moves above $13 without first closing under $12, this trade setup is no longer valid.

Remember that because of the phase III trial for Puricase, there is an added degree of risk that this setup will not trigger or that a gap up against the position will occur. So you should adjust your capital risk accordingly.

Updates on Previous Picks

  • Alliance Resource Partners(ARLP) - Get Report is still open with the entry at $35.75. The stop is at $37.75, which offers $2 in risk. The first profit target is $33.75, and the final profit target will be determined if the current support at $33.50 fails to hold as support on a closing basis. Shares closed at $36.51 Monday.
  • Copa Holdings(CPA) - Get Report is being taken off the Watch List. Shares moved above $57.50 without first closing under $50, invalidating the setup.
  • Intermec (IN) also remains open, with its entry at $24.36. The first profit target of $22.25 has already been hit. Partial profits could have been taken there, and the stop should be lowered to $23. The final profit target is $19.50. Shares closed at $22.63 Monday.
  • PetMed Express(PETS) - Get Report is still open with an entry at $12.80. The stop at $14.25 offers $1.45 in risk, and the first profit target at $11.35 satisfies the one-to-one reward/risk ratio. Partial or full profits could be taken there. If partial profits are booked, the stop can be lowered to $13. The final profit target would be the September lows of $9.50. Shares of PetMed closed at $12.25 Monday.
  • Raven Industries(RAVN) - Get Report is being taken off the Watch List. Shares moved above $28.25 without first closing under $25.40, invalidating the setup.

At the time of publication, Schumacher held no positions in the stocks mentioned, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer, co-author of

Techniques of Tape Reading

and and contributor to

TheStreet.com Short Advisor

. He has delivered seminars throughout the U.S. and is a featured speaker at trading expos. He is a graduate of Ohio State University and has served as a guest lecturer at Ohio State University's Fisher College of Business as well as the Center for Entrepreneurship. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback;

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