Cheating On Base Breakouts
Sometimes, stocks will offer
“cheat” zones that cue you to early entry points within a larger,
developing base. Genentech is forming a consolidation zone within a correction-recovery pattern that could fit the bill.Â
NYSE-listed Genentech
(
DNA |
Quote |
Chart |
News |
PowerRating) gained
1 to 183 3/4 on Tuesday following positive news about the biotech giant’s new
clot-busting drug.
Citing a one-year study presented in Amsterdam, Reuters reported that the drug, TNKase, works as well as
Genentech’s older clot-buster, Activase in saving the lives of heart attack
patients. TNKase can be administered by a single injection in five seconds.
Activase, which is the standard treatment, takes 90 minutes to administer
through intravenous infusion. Mortality rates for Activase and TNKase were
identical at 9.7%, according to the study.
As you can see in the above chart, the
stock cleared a seven-week zone on Aug. 24 on normal volume. The next session,
shares followed through into higher ground on more active trade. (See Point
A in chart.) The stock now is consolidating above the top of its
prior base on declining volume.
So far, that’s healthy market action.
Ideally, Genentech would drift on light volume and tighten. If it does, assuming
Aug. 24 holds as the high of this particular price structure, you could use the
Aug. 24 intraday high of 190 1/4 as a pivot point if the stock breaks above that
level on strong volume.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find a mother lode of lessons in the Money
Management area of TradingMarkets’ Stocks Education section.
As you can see in the following chart, Genentech’s consolidation zone has formed within a six-month base extending from the stock’s all-time high of 245 on March 6 through the correction low of 84 1/2 on May 24 to present. I’ve outlined
the consolidation zone with a black arc.
As is often the case, stocks in the
same industry share similar chart patterns. You can see in the following chart a
like consolidation area within a larger base in the Amex-listed Biotech HOLDR
(
BBH |
Quote |
Chart |
News |
PowerRating),
Merrill Lynch’s basket of such biotech stocks as Genentech, Amgen
(
AMGN |
Quote |
Chart |
News |
PowerRating),
Biogen
(
BGEN |
Quote |
Chart |
News |
PowerRating), Immunex
(
IMNX |
Quote |
Chart |
News |
PowerRating), MedImmune
(
MEDI |
Quote |
Chart |
News |
PowerRating) and Affymetrix
(
AFFX |
Quote |
Chart |
News |
PowerRating),
Human Genome Sciences
(
HGSI |
Quote |
Chart |
News |
PowerRating) and Celera
(
CRA |
Quote |
Chart |
News |
PowerRating).
HOLDRs, or Holding Company Depoistory
Receipts, are part of a class of security referred in TradingMarkets as
funds. ETFs combine the diversification of mutual funds with the
tradable quality of stocks. The vast majority are traded on the American Stock
Exchange, including all the HOLDRs.
If this class of security interests
you,
be sure to visit TradingMarkets’ Knowledge Center,
dedicated to explaining the basics of trading and active investing in ETFs and
mutual funds. Just click on the Funds tab
near the top of this page, then click on the Knowledge
Center tab. Also check out my Money
Flow Outlook commentary, which appears at 10 p.m. ET on the
TradingMarkets home page after each market close and tours the day’s activity in
tradable funds.
You also will find lessons on trading
exchange-traded funds in the Stocks Education area of TradingMarkets.com. In
particular, check out my three-part series on trading ETFs, starting with
Average Crossovers. I also recommend newcomers read my tutorial,
HOLDRs: Unique Opportunity And Risk.
Registration for the King of the TradingMarkets I, a futures trading
simulation contest, is now available! Over $8,000 in prizes will be won by Trading Markets Members over a 30-day period. Click on the following link
for details: