This column was originally published on RealMoney on July 18 at 11:14 a.m. EDT.
The market has been very generous to the bulls these past couple of weeks. The major averages continue to trend higher, although the daily trading ranges are starting to tighten up. As an uptrend matures, the daily ranges will typically narrow as the bulls begin losing the power to push higher, while the bears are not yet strong enough to press stocks lower.
This decline in intraday trading ranges tends to lull market participants into complacency, assuming that the status quo will continue. But it never does. At some point, this narrowing intraday trading range will lead to either a breakout or a trend reversal.
Deciding what to do during these periods of low volatility depends on whether you are already involved. If you are long, these tight range periods are opportunities to lock in profits -- either by tightening up your stop or simply taking some off the table.
And if you are on the sidelines, these low-volatility periods present you with a chance to test the waters. Bulls take the opportunity to buy more, and bears take the opportunity to put out some shorts. Only one will be proven right, but every market needs two sides.
Last week I covered some
semiconductor stocks. Today, let's shift gears a bit and look at some biotech stocks. On Friday, when most sectors were range-bound, the biotech sector was up by about 3%. That's enough to get my attention.
On July 8,
broke above the June high. But last week's trading range was pretty tight -- until Friday. With a 3% jump in price, Abgenix is on the move again, probably in anticipation of the company's July 26 earnings report.
RSI (relative strength) is bullish, and the accumulation-distribution line is also confirming the uptrend. The money flow index likewise shows very impressive buying pressure after just a brief dip in early July.
I'd love to see a retest of support, but we may not get it until after earnings are announced.
is again testing resistance. The stock has been building a base since late 2003, but each thrust higher has failed at around $29. But the lows have been on the rise, so this latest test began at a higher level than the last. That should make it easier for the bulls to get over the hump. I'd be a buyer on any move higher, so long as it's accompanied by heavy volume. Earnings are announced July 21.
announced earnings earlier this month. You can see how the market reacted. What is particularly compelling about this chart is the extended period of low volatility that began in early June and resolved to the upside earlier this month. When stocks move out of such a tight squeeze, they tend to run for a bit.
Here, the trading volume remains higher than average, and the secondary indicators are bullish. If you are long, consider following the uptrend with a loose trailing stop. And if you're itching to get involved, you might want to wait for a pullback. After all, Genentech has closed higher eight of the last 10 trading days.
Protein Design Labs
Protein Design Labs
has been trending higher for the past four months. I've drawn the most prominent support trend line, and I'd wait for a retest before buying. While RSI remains strong, it has pulled back over the past few days. But I suspect the pullback is due to some profit-taking rather than the beginning of a reversal. Earnings come out on Aug. 2.
is aptly named: Shares have had incredibly strong upside momentum. In mid-June that stock was at $10. It traded at almost $35 last Friday. With RSI near 90, this is not a stock that I'd look to short. It's just too strong.
If I was long, however, I'd have a very tight stop so I don't give back too much if the upside momentum falters. I've drawn the loosest stop I'd use -- just beneath Friday's low. But keep in mind that Friday's close was 20% higher than the intraday low. That's a big giveback! So if you caught this fast mover last week, consider just taking some off the table as a matter of discipline. The market gods rarely reward greed. Momenta has not yet announced when earnings will be released, but I'll be watching. I wouldn't want to be long when earnings are announced -- "buy the rumor, sell the news" comes to mind.
Be careful out there.
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At time of publication, Fitzpatrick was long Genentech, though positions may change at any time.
Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
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