DELAFIELD, Wis. (Stockpickr) -- I love trading the biotech sector. When this sector is in play, it offers traders the opportunity to capture some big moves over very short timeframes.
Until you've seen it and traded it, you just don't know how quickly profits can come when you find the right opportunities in the biotech complex. Of course, most traders are completely turned off by biotech stocks right now since the entire sector has been under heavy selling pressure -- but that selling pressure might be ready to come to an end in the short-term. The iShares Nasdaq Biotechnology Index ETF (IBB) has started to bounce higher right above its 200-day moving average of $218.83 a share. Shares of the IBB are currently trading at $232 a share, or up 2.9% on the day.
Since this bounce is occurring right above a key technical level -- one that's watched by traders and, more important, by longer-term investors -- the biotech sector could be due for a sharp recovery rally in the short-term. This could be the perfect time to start hunting the biotech complex for names that are not only looking decent from a technical standpoint but also have a major catalyst on the horizon.
One development-stage biopharmaceutical stock that's hitting my scans here is Catalyst Pharmaceutical Partners (CPRX), which focuses on the development and commercialization of novel prescription drugs targeting rare (orphan) neuromuscular and neurological diseases and disorders. Some of the diseases Catalyst is trying to fight are Lambert-Eaton Myasthenic Syndrome, infantile spasms and Tourette's disorder. Despite the major selloff recently in the biotech sector, this stock is actually up so far in 2014, by 16%.
Catalyst Pharmaceutical Partners' lead drug candidate, Firdapse, is being developed to treat LEMS and is currently in clinical testing. The company recently announced that it hit its patient enrollment target for its pivotal phase III trial for Firdapse and said it's on track to report top-line data from the double-blind portion of the trail in the third quarter. Catalyst Pharmaceutical Partners is hoping the trial will produce positive results so it can take the drug before the FDA in early 2015 and get it approved for LEMS sufferers.
The potential market opportunity in North America for Firdapse has been estimated to be $100 million annually. Wall Street would most likely celebrate any positive news in the third quarter for Firdapse. This sets up a potential catalyst trade for shares of CPRX here that could see the stock run up significantly into the third-quarter data release.
One reason I like the idea of CPRX working as a run-up trade here is because the company recently announced a public offering of around 13 million shares of its common stock at $2.21 per share. The net proceeds of that offering are expected to be $26.8 million, and the funds will be used to continue with their development of Firdapse and CPP-115. CPP-115 is being designed to treat epilepsy other selected central nervous disease indications.
Now that this offering is out of the way, this will clear the runway for shares of CPRX to take off right into the third quarter. I also like that CPRX traded higher off the offering news, at least during the following trading session, and the stock is currently changing hands around that offering price. There's always risk CPRX could do another offering, but that seems a bit less likely now. Traders and investors are getting the chance at current levels to get long CPRX where we would like to think the "smart money" just took a big stake.
From a technical perspective, shares of Catalyst Pharmaceutical Partners are currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last four months and change, with shares moving higher from its low of $1.29 to its recent high of $2.51 a share. During that uptrend, shares of CPRX have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of CPRX recently trended down to its 200-day moving average at around $1.92 a share and have started to bounce higher back above its 50-day moving average at $2.13 a share. That bounce is starting to push shares of CPRX within range of triggering a major breakout trade.
Traders should look for long-biased trades in CPRX if it manages to break out above some key near-term overhead resistance levels at $2.40 to $2.51 a share with high volume. Look for a sustained move or close above those levels with volume that registers near or above its three-month average action of 980,897 shares. If that breakout hits soon, then CPRX will set up to re-fill its previous gap-down-day zone from last October that started at $2.75 a share. If that gap gets filled with strong upside volume flows, then CPRX should have no problem making a run at its 52-week high of $3.65 a share, if not much higher.
Traders should also keep in mind that shares of CPRX are loaded with short-sellers. The current short interest as a percentage of the float for CPRX is extremely high at 22.2%. Now that the offering is out of the way, shares of CPRX are starting to set up technically for a massive short-squeeze that could send this stock exploding higher into that third quarter data release.
Be ready to take this trade if it triggers soon, so put shares of CPRX on your trading radar.
-- Written by Roberto Pedone in Delafield, Wis.
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.