This Relative Strength Play Is Ready to Pop

 DELAFIELD, Wis. (Stockpickr) -- U.S. stocks are struggling to gain any traction on Tuesday after the Commerce Department said the trade gap narrowed in March by 3.6% to $40.4 billion, which was basically in line with economists' expectations.

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All three major averages are trending lower midday, with the Dow Jones Industrial Average off by around 75 points, the S&P 500 down by 7 points and the tech-heavy Nasdaq trending lower by around 20 points.

On down days like today, I like to scan the markets for stocks that aren't going down and that are showing some relative strength. Relative strength is a momentum investing strategy that compares the performance of a stock to that of the overall market. The strategy assumes that if a stock is rising while the market is falling, then that stock should see its price continue to rise.

One stock that's showing some relative strength today and that has some positive news flow is mid-cap biotechnology player InterMune (ITMN), which focuses on the research, development and commercialization of therapies for pulmonology and orphan fibrotic diseases in North America and Europe. This biotech stock has been incredibly strong so far in 2014, with shares up huge by 192%.

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InterMune recently reported earnings and said year-over-year sales during the first quarter for its lead drug, Esbriet, a treatment for idiopathic pulmonary fibrosis, were very strong. Those sales jumped by 188% during the quarter to $30.3 million, from $10.5 million in the year-ago period. Based on those strong results, InterMune raised its 2014 revenue guidance to a range of $130 million to $140 million. That jump in guidance now puts the potential revenue growth for Esbriet at 85% to 100% from its 2013 revenue of $70.3 million. That's some monster growth, and the market will be sure to reward InterMune if the company can hit those targets.

InterMune plans to resubmit its application for Esbriet with the FDA in the U.S. sometime in the early part of the third quarter. If the company can achieve FDA approval, then the planned launch for the drug in the U.S. should hit sometime during the second quarter of 2015.

The recent strong earnings news for InterMune is a nice backdrop for the stock, but the bullish news flow today comes from a number of analysts' comments. One report suggests the company could potentially be acquired in a few months, according to dealReporter.com. Another report from Oppenheimer says the stock should be bought ahead of the American Thoracic Society meeting that's slated for later this month. Oppenheimer also said it met with three leading experts who believe that Esbriet is significantly more tolerable than a competing drug.

Even better than this bullish news flow is the technical picture that's quickly shaping up for the ITMN chart. To me, a stock isn't worth getting excited over off news alone unless the chart looks strong and is technically setting up for higher prices. At the end of the day, a stock needs more buyers than sellers to go higher, so you can't just rely on fundamental developments or bullish news.

From a technical perspective, shares of InterMune have been uptrending strong over the last few weeks, with shares moving higher from its low of $24.27 to its intraday high of $36.35 a share. During that uptrend, shares of ITMN have been consistently making higher lows and higher highs, which is bullish technical price action. This strong uptrend is starting to push shares of ITMN within range of triggering a major breakout trade above some key near-term overhead resistance levels.

Traders should look for long-biased trades in ITMN if it manages to break out above some near-term overhead resistance levels at $38.29 a share to its 52-week high at $38.73 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.57 million shares. If that breakout materializes soon, then ITMN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $45 to $50 a share, or even north of $50 a share.

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Market players can look to buy ITMN off weakness as long as this stock maintains its trend above its 50-day moving average at $31.71 a share. One could also buy off strength once it clears those breakout levels with strong volume and then simply use a stop that sits a comfortable percentage point from your entry.

Another reason that shares of InterMune could make a very large move if it breaks out soon into new 52-week-high territory is due to the stock's high short interest. The current short interest as a percentage of the float for ITMN is pretty high at 12.7%. That means that out of the 83 million shares in the tradable float, 10.46 million shares are currently sold short by the bears.

The bottom line: InterMune just reported strong earnings, and the news flow for the stock remains bullish with chatter of a possible buyout and an upcoming meeting that could be a catalyst for shares. The technical picture for the stock is also bullish as shares are quickly approaching a possible breakout into new 52-week-high territory. Shares of ITMN are also heavily shorted, so traders should put this name on their radar if we continue to see relative strength, since a large short squeeze is also possible.

-- Written by Roberto Pedone in Delafield, Wis.

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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.

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