Publish date:

Two Biotechs With Promising Charts

The charts of Ariad Pharmaceuticals and Achillon Pharmaceuticals are beginning to show interesting formations.

Biotech companies almost always hold great promise along with significant risk. Today we'll take a look at two such companies whose charts are starting to show interesting formations --

Ariad Pharmaceuticals

(ARIA)

and

Achillon Pharmaceuticals

(ACHN) - Get Report

. The former is focused primarily on cancer treatments while the latter works to find treatments for infectious diseases. Neither makes money so you really are banking on the future with both.

Since I'm not well versed in the medical field nor in the particulars of either of these biomedical names, my interest is strictly driven by the charts and an interpretation of the patterns that I see in each. Both hold promise.

Starting with ARIA, if you pull the chart back and look at the long-term picture, there is a downtrend line that intersects prices just about where ARIA is currently trading.

The significance of such a long-term trend line is great. If ARIA is able to successfully trade through the resistance represented by that line as well as the horizontal resistance zone annotated on the chart, the long-term prospects will take on added bullishness.

Note how volume expanded in March as the resistance zone was attacked. When volume expands into resistance that is a good sign for the time frame being examined which is long term in this instance.

Moving to the shorter-term view, here we see each thrust higher coming on increased volume. Note that although the price increases in May have had increased volume, the general market weakness has weighed on prices and has contained the upside it appears. This has resulted in consolidation.

Now don't get me wrong, there's nothing wrong with consolidation. In fact, consolidation at this juncture is the best place for it to be happening. ARIA is poised to attack the resistance areas and it needs to collect itself before the assault. There needs to be enthusiasm when new price highs are hit otherwise it will simply fall back down and retest the other side. Right now, in my opinion, ARIA is doing what it should be doing in order to move higher in due time.

ACHN presents a slightly different picture. Here's a daily chart that shows what happens when volume doesn't expand as previous bars with volume are hit. Look at the highlighted bars that have volume.

TheStreet Recommends

The last annotated bar was a gap up that ran headlong into resistance as represented by the top of the first highlighted bar (from early March) and the bottom of the other (from mid-April). Those two bars stopped ACHN from trading higher and actually reversed the gap-up opening move. That is the power of high volume bars when the volume attacking them fails to expand sufficiently.

The reason for looking at ACHN as a potential buy though isn't found on the daily chart but instead the weekly.

Take a look at the large volume bar from December 2009. That bar has 11 million shares traded with a low of $2.06. It was tested a couple weeks back and there was no volume expansion into the test. I like to call this a retrace trade -- you buy as prices retrace on lighter volume into strong support.

The setup on a trade like this is what you trade for. In such a situation, you can buy into ACHN with a relatively tight stop to protect yourself while shooting for a retest of the highs on this time frame.

Both ARIA and ACHN have appealing formations. As the general market begins to steady, if you want some smaller biotechnology exposure, look to these names as possible long positions. The charts are appealing.

So until next time, just keep trading the charts!

At the time of publication, Little had no positions in the stocks mentioned, though positions can change at any time.

L.A. Little, author, professional trader and money manager, writes daily on

www.tatoday.com

, a free educational site for traders and investors. He has been featured in numerous publications and is the author of

Trade Like The Little Guy

.

His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.