Blue chip biotechs have been stuck in the mud since the bear market ended, as I pointed out Monday. The small- and mid-cap biotech universe, however, continues to offer speculative opportunities for aggressive traders and investors. Just be careful how you approach these volatile issues, because bad timing or misplaced sentiment can do major damage to your bottom line. There are a number of equally valid approaches to biotech speculation. TheStreet's resident biotech guru Adam Feuerstein offers a comprehensive strategy that focuses on key drug applications with the greatest growth potential and the best prospects for approval from the Food and Drug Administration. Of course, there will be few misfires in this approach, but it can also make you a ton of money. I prefer a different methodology, because I'm a total coward when playing these issues and am not seeking exposure to the ultimate prize -- i.e., an approved drug that can be wrapped, marketed, sold in a dozen pill shapes and capsules. Instead, I choose to play the speculator, rather than the speculation. That is, I profit exclusively from the chatter, table pounding and newsletter endorsements that these idea-rich, cash-poor stocks attract on a daily basis. The timing strategy of this technically oriented approach is simple, yet powerful -- play the stocks into key meeting or research dates, but jump back to the sidelines before market-moving data or decisions hit the newswires. This requires familiarity with the development schedules of the companies you're trading, as well as their key milestone dates. Even so, you're not going to avoid news exposure 100% of the time because of the FDA's fickle nature. The agency has released preliminary findings ahead of meeting dates, and drug trial results that are rushed to public view because they're much better or much worse than expectations. The good news is that these shocks should average out over time, allowing the underlying strategy to work its magic.
With these timing tools in hand, let's look at five biotech stocks that are generating speculative interest as we head through the last month of 2010. NBIX) creates drugs for neurological and endocrine diseases. The stock broke out of a long basing pattern in May and lifted to a two-year high near $6.50 in August, then rallied to another high in October and topped out at $8.69 a few weeks later. It's been consolidating under that level for the last six weeks, with the next buy signal set to trigger when it finally trades above that high (red line). Steep resistance near $15 could end the uptrend, so longer-term players should watch that barrier closely. ONCY) creates designer viruses that can be used in all sorts of cancer treatments. It hit an all-time high at $9.84 in 2004 and dropped into a long downtrend that finally bottomed out at $1 in late 2008. The subsequent recovery has lifted the price to a five-year high , reaching that level in Monday's session with a high-volume surge. This price action sets up a low-risk buying opportunity on any pullback toward the $5-to-$5.25 area (blue line), and that trade signal could come in the next one or two weeks. ARIA) was a speculative favorite more than a decade ago when it traded up to $48.50. The cancer-drug developer then fell on hard times, but it has perked up considerably in the last two years. It's now carved out a six-month cup-and-handle breakout pattern with resistance above $4.60. A rally above that level could ignite a momentum rally that reaches the three-year high at $6.40. That would offer an excellent price at which to take high-percentage profit.
PBTH) creates a variety of proteins for diverse medical conditions, including cancer, obesity and adolescent growth disorders. It came public near $2 in 2007 and sold off, bottoming out in 2009 before jumping to an all-time high in January of this year. The uptrend stalled at $8.85 in June, after which the stock dropped into a bowl-shaped correction. Buying interest has picked up again in recent weeks, with the price getting ready to test the breakout level (red line) perhaps as early as January. AMRN) caught fire last week when it released promising results on a cholesterol-lowering drug. The stock gapped up to a three-year high at $6.30, and it's been consolidating at that level for the last week. Sideways action might continue for a while and even yield a partial fill of the big gap. Interested buyers can use two entry techniques, depending on price action. First, buy a rally above the high (blue line). Second, wait until the price drops into the gap, and then buy when it pops back above the opening tick of the breakout bar (green line).