DELAFIELD, Wis. (Stockpickr) -- The biotech sector is back in vogue today.
This space has been under heavy selling pressure of late, but things are quickly turning around for the beaten-down biotech stocks. If you take a look at the performance of the iShares Nasdaq Biotechnology Index (IBB) today, you'll see that this major barometer of biotech equities is ripping to the upside by 3.4% to over $235 a share. This biotech ETF had recently dipped below its 200-day moving average, but it has now formed a V-shaped bottom chart pattern as it rips significantly higher above that key technical level.
This action is sweeping across the sector and has many small-cap biotech stocks catching a decent bid for the first time in awhile. This has prompted me to scan the small-cap biotech complex to look for names that are beaten down to extremely oversold levels that could easily see some sharp rips higher in the coming days or weeks. These rebound ideas could be great plays for large short-term gains for traders fast enough take advantage of the situation.
One small-cap biotech stock that's been crushed of late is Prana Biotechnology (PRAN), which is engaged in developing therapeutic drugs designed to treat the underlying causes of degeneration of the brain and the eye as the aging process progresses, initially focusing on Alzheimers disease. This small-cap biotech stock is down huge so far in 2014, with shares off sharply by 71%. Shares of PRAN are down for good reason after the company recently announced that its experimental drug PBT2, which targets Alzheimer's disease, failed its phase II trials. The drug failed to improve cognitive function or to reduce amyloid plaques in patients.
The failed trail has now pushed shares of PRAN sharply lower, from its recent high of $11.59 to its 52-week low of $1.67 a share. That massive drop has now sent shares of PRAN into extremely oversold territory, since its current relative strength index reading is below 23. From a fundamental perspective, PRAN probably deserves to be down where it is, but from a technical perspective, this stock is looking ripe for a short-term rebound that could send shares screaming higher.
When a stock gets destroyed that much in a very short timeframe, traders need to put themselves into the minds of the shorts. Those short-sellers have banked big coin, and considering the technical situation of PRAN, it might be a great time for them to lock in some profits and buy the stock back for a rebound trade. Smart shorts know the market works in both directions, and if they really hate PRAN, they can look to short it again from higher levels instead of pressing their bets near 52-week lows.
Prana Biotechnology currently sports a short interest as a percentage of its float of around 10%. That means that out of the 38 million shares in the tradable float, 3.85 million shares are sold short by the bears. This is a big short interest on a stock with very low tradable float. If the shorts decide to start covering some of their bets and locking in profits, then this stock could easily spike sharply higher in the short-term.
If you consult the chart for Prana Biotechnology, you'll notice that this stock has already started to bounce a bit off its 52-week low of $1.67 a share. Shares of PRAN are now starting to break out above some near-term overhead resistance at $1.94 a share with lighter-than-average volume. Volume so far today has registered just over 1.05 million shares vs. its three-month average action of 3.05 million shares. The rebound for PRAN is also starting to trigger another bullish technical signal, since its moving average convergence/divergence, or MACD, indicator is starting to trigger a bullish crossover.
This extremely oversold condition combined with an improving technical picture and MACD crossover make a short-term rebound trade for PRAN look attractive. If you're short this stock, you might be better served to get out of the way if the strength in the biotech sector can sustain itself for a bit. Believe me, I won't be the only trader looking at beaten-down small-cap biotech stocks that could be set to squeeze the shorts a bit in the near-term.
Traders should now look for long-biased trades in PRAN as long as it's trending above Tuesday's low of $1.88 and then once it breaks out above some near-term overhead resistance levels at $2.15 to $2.20 a share with high volume. Look for volume on that breakout that registers near or above its three-month average action of 3.05 million shares. If that breakout materializes soon, then PRAN will set up to re-test or possibly take out its next major overhead resistance levels at $2.47 to its gap-down-day high of $3.24 a share. Any high-volume move above $3.24 will then give PRAN a chance to re-fill some of its recent gap-down-day zone that started at $10.30 a share.
If PRAN can muster a up a rebound here, then I don't think it's out of the question to see the short-covering push this stock towards $3 to possible even $4 a share. That $4 target will only come into focus if PRAN gets into that gap with strong upside volume flows. Some lower end targets that could easily get hit are $2.50 to $2.75 a share if the shorts are done leaning on PRAN in the short-term. This is name worth watching for an oversold rebound trade, so make sure to put it on your biotech trading radar.
-- Written by Roberto Pedone in Delafield, Wis.