You don't need me to tell you that there are two parts to any trade. First, for long trades, we have to buy something. Then, to actually turn paper profits into real money, we have to sell it.
To me, biotech giant Amgen (Nasdaq: AMGN) is at that latter point. After a nearly 20% run since its late-June lows, it looks like it's time to cash in or flip it around to an outright short.
Some may argue that the fundamentals still look decent and that AMGN is trading near its all-time high. However, the entire health care sector is in a precarious situation with drug and service providers at the greatest risk as politicians take a stand against their high prices. These groups are underperforming the market and some already display technical breakdowns on the charts.
The first item to take note of on Amgen's chart is a small double-top formed by the July and August highs. Some may say that the pattern is not valid due to the fact that, after an initial breakdown, the stock moved back above the pattern's lower border. But I say the spirit of the pattern is there with waning momentum indicators and bearish divergences in volume, cumulative volume and even relative performance versus the broader market.
After all, a double-top represents a push to a new high, a small pullback and a failed attempt to set an even higher high. This failure is confirmed with a low below the center of the "M" shape of the pattern. Unless Amgen suddenly springs to life on some news, all of this is now in place.
The double-top pattern also took place within Bollinger Bands. While the first peak did poke its head above the upper band, the second peak was fully contained. The breakdown into the lower half of the bands confirmed the signal.
And as the TV pitchman says, "But wait, there's more!"
On Aug. 24, AMGN fell sharply following news that the FDA rejected its new drug application for its therapy for a hormonal imbalance common in patients on dialysis. As is often the case after a big one-day drop, the middle of that day's range acts as resistance. Followers of candlestick analysis often use the middle of tall, or large-range, candles as support and resistance.
Sure enough, the stock bounced two days later and failed when it got to that level.
Finally, sentiment is bullish, with the majority of analysts rating the stock a buy and none rating it a sell. When everyone is leaning one way, the market usually goes the other.
Such high expectations set up Amgen to disappoint at its next earnings report in late October. That is quite a way down the road, but the extreme bullishness is a bearish indicator even before earnings are released, as the majority of bulls will buy now instead of waiting.
The bears look set to grab the reins, but to be safe, I will wait for the stock to fall below its lowest close of this month at $170.23 for my sell signal. Below that, I expect a quick drop to the July breakout level at roughly $157. That also happens to be near a Fibonacci 61.8% retracement for the June-August rally.
Recommended Trade Setup:
-- Sell AMGN short below $170.23
-- Set stop-loss at $175
-- Set initial price target at $157 for a potential 8% gain in four weeks
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This article originally appeared on ProfitableTrading.com: Biotech Winner Less Than $1 Away From Issuing A Sell Signal