Biotech Rallies. So What?
Biotechs had their day but the sector
has little to offer the medium-term
momentum trader. The overwhelming majority of sector components remain in
downtrends or, at a minimum, under tons of overhead supply. Look elsewhere for the
intermediate-term momentum trade.
As for the biotechs, Affymetrix
(
AFFX |
Quote |
Chart |
News |
PowerRating)
was one of the best performers Tuesday. The stock gained 6 5/8 to 68 1/16 on
volume of 2 million shares, twice its usual trade as averaged over the past 50
sessions. Overnight, the Santa Clara, Calif.-based company, which is the No. 1
manufacturer of array chips used to analyze genes, reported a Q4 loss that beat estimates on a 58% percent increase in product
sales.
The company posted a Q4
net loss after excluding acquisition-related charges of 6 cents a share vs. a
year-ago loss of 10 cents and analyst estimates averaging a loss of 11 cents,
according to First Call/Thomson Financial.
Big deal. The stock is 62% off its
March 2000 highs, its 50- and 200-day moving averages are inverted, and the stock closed Tuesday below
the 200-day. Enough said.
I like the retail sector better.
Abercrombie & Fitch
(
ANF |
Quote |
Chart |
News |
PowerRating) appears to be forming a handle after a
U-shaped correction-recovery pattern. The rather deep base — 53% from
pre-correction peak to trough — is a bit of a concern. The deeper the base, the
more I tend to look for length to help a stock get past profit-taking. This base
is 11 weeks in length. That’s decent. You can trade cup-with-handles as brief as
five weeks in length, but I wouldn’t do so if the depth were below 33%.
The stock has cleared its 50-day and
200-day moving averages as well as its mid point, the half mark between its
pre-correction high and correction trough. All things being equal, this is a
good sign. It shows that the stock is making progress toward clearing overhead
resistance posed by weak hands selling their shares and cutting their losses.
However, EMC is rather deep for a base
— a 50% decline from peak to trough on an intraday basis. I won’t automatically
rule out a stock because of a deep base but I usually look for other issues
that have held up better against a correction. The ordinary tests for overhead
resistance clearance may not suffice here.
Another problem with very deep bases:
the long road back to new high ground. A stock like EMC which has lost half its
value must double in price to notch a new high. Look how EMC has already moved up
52% and looks extended even though it’s still well off its old high.
EMC is a great company. But as famed
short-seller and Market
Wizard Dana Galante
points out, good companies can still make for bad stocks, and vice versa. If the
stock pulls within 5% of its old high, I’ll be watching. But this is not the
kind of stock that I’d “cheat” on by looking for early entries.
The top field of all
charts in this commentary uses a logarithmic price scale and displays a 50-day
price average in red and a 200-day moving average in black.
In the second field, a blue relative strength line represents the displayed
security’s price performance relative to the S&P 500. The third field
displays vertical daily volume bars in black with a 50-day moving average in
blue for volume.
Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.