A Beaten-Down Biotech Stock Gearing Up for a Big Squeeze Higher

DELAFIELD, Wis. (Stockpickr) -- Fireworks are going off in the biotech sector today, after Vertex Pharmaceuticals (VRTX) reported very positive results from an important late-stage drug trial regarding its cystic fibrosis treatment Kalydeco.

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The company announced that the combination of two of its drugs, lumacaftor and Kalydeco, showed positive results for treating symptoms of cystic fibrosis, such as improvement in lung function. Shares of VRTX are ripping sharply higher off this news, with the stock up over 35% as I type this.

This action is setting off some of the small-cap biotech stocks as traders scan the sector for the next big movers. Just take a look at the action in some small-cap bio names such as IsoRay (ISR), which is soaring higher by 17%; Ibio (IBIO), which is ripping higher by 9%; and KaloBios Pharmaceuticals (KBIO), which is trending sharply higher by 8%. As a trader, this sector behavior has me scanning the biotech complex for the best-looking charts so I can attempt to get in early and catch the buying wave if it spills over to more of the small-cap names.

The technical setup for IsoRay happens to be one that I flagged before this move in June 5's "5 Stocks Under $10 Set to Soar" at around $2.50 per share. That setup has produced a very solid gain, since the stock tagged an intraday high of $3.26 a share today.

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One biopharmaceutical player with a hot-looking chart that's jumping off screens today is Synta Pharmaceuticals (SNTA), which focuses on the discovery, development and commercialization of small-molecule drugs for treating severe medical conditions, including cancer and chronic inflammatory diseases. Shares of Synta Pharmaceuticals have been under pressure by the sellers so far in 2014, with shares off notably by 16%.

One of the big reasons I am warming up to shares of Synta Pharmaceuticals here is the massive short interest on the stock. The current short interest as a percentage of the float for Synta Pharmaceutical is extremely high at 24%. That means that out of the 55.7 million shares in the tradable float, more than 13 million shares are sold short by the bears. This is a large short interest in a stock with a relatively low tradable float. If the biotech sector continues to catch fire, then a stock like SNTA is going to be exactly what fast traders reach for. Starting a short squeeze in STNA won't be hard to do with that relatively low float and quickly improving technical picture for the stock.

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Another reason that I like shares of Synta Pharmaceuticals here from a trading perspective is the fact that billionaire hedge fund manager Bruce Kovner has buying snapping up a ton of shares of SNTA recently. Kovner is chairman of Caxton Alternative Management, which he set up in January 2012 to manage his investment, trading and business activities. His most recent estimated net worth is said to be in the range of $4.8 billion. Kovner is famous for getting his start in trading by borrowing $3,000 against his credit card and turning that into $23,000 trading soybean futures contracts.

Kovner has bought some huge blocks of Synta Pharmaceuticals recently, like in early April, when his fund added $5 million worth of SNTA at $4.01 a share, and in November 2013, when his firm snapped up $18.75 million at $3.75 a share. Kovner also bought around $20 million in December 2012 at a much higher price of $8.60 a share, so his timing hasn't always been right, but he's clearly building a large position for more than just a short-term trade. In fact, it wouldn't surprise me one bit to see Kovner step up again soon to buy shares of SNTA, since he's been steadily buying it since June of 2012.

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