Technicals Make The Case For A 33% Rally In This Biotech
When it comes to finding stocks that are more likely to go up than down, nobody has a crystal ball. What we do have, however, is evidence that we can weigh, compare and, if necessary, massage — but only a little.
I liken chart analysis to a judging a civil trial in the courts. We look for a preponderance of evidence to make our judgment to buy, sell or hold, and right now I see a good case to buy Tesaro (NASDAQ: TSRO).
Tesaro is an oncology-focused biopharmaceutical company, and that is its first bit of evidence. Biotech as a sector is beating the market and in fairly good shape. A strong sector is a big part of a stock’s strength, so this goes in the plus column.
The next is the big picture. Since peaking in June of last year, roughly a year after it began trading as a public company, the stock eased lower for many months. Weekly charts show a clear declining trendline from that time and a somewhat less clear parallel channel guiding it lower.
This is not a positive on its own, but it does leave us with a good trigger for the buy. A move above the trendline confirms the transition from bear to bull.
There are two ways to look at the trendline, however. The most common is to simply draw a line connecting the interim highs. In this case, the stock has not yet broken out. However, the interim highs were created by several intraday spike moves that really do not adequately represent the stock’s value on each of those days.
#-ad_banner-#That is why I prefer to use a line drawn through daily closes. In this case, TSRO has already made its first breakout move, and we can justify it with moving averages.
Price action is now solidly above all major moving averages including the 200-day, 50-day and 20-day varieties. Chart watchers want a stock to be above the average relevant to the time frame in which they operate, and this stock satisfies all types of traders.
Next, we turn to indicators. Momentum-wise, there is little to like. But cumulative, or on-balance, volume is singing a nice tune. It started rising in late April, and even as price action took a serious dip in September and October, cumulative volume kept on moving higher.
We can interpret that as rising demand as smart money scooped up shares at cheaper prices. And even now, as prices are still well below previous peak levels, cumulative volume is at its highest levels since January.
Finally, over the past few days, the stock eased lower on falling volume to consolidate its trendline breakout. This is the classic definition of a bullish flag pattern, and while it may last a few days longer and dip slightly lower, it does look ripe enough for a nibble.
For the near term, there is resistance above $34 from its summertime high. But given the size of the decline from last year, TSRO does seem to be capable of reaching its March high near $40.
Recommended Trade Setup:
— Buy TSRO at the market price
— Set stop-loss at $28.20
— Set initial price target at $34.25 for a potential 13% gain in four weeks
— Set secondary price target at $40.40 for a potential 33% gain in 10 weeks
Note: Over the past year, one little-known indicator spotted 29 stocks right before they jumped double digits in a month. Now, it’s tagged another stock as an immediate “buy.” In fact, it’s flashing the same kind of buy signal as a stock that rose 266% in a year. Get its name here, including all the details on this indicator.
This article originally appeared on ProfitableTrading.com: Technicals Make the Case for a 33% Rally in This Biotech