Stay Wary Of Drug Bounce
Use earnings growth to keep you targeted on the kind of companies that stand
the best chance of attracting heavy market demand. But don’t buy, no matter
how rosy the fundamentals, until the market gives the go-ahead.
After Wednesday’s close, Applied Materials
(
AMAT |
Quote |
Chart |
News |
PowerRating), the world’s biggest
maker of semiconductor manufacturing equipment, reported earnings of 70 cents a
share in the July 30 third quarter, up from 31 cents in the year-earlier
quarter. Those results topped analyst estimates averaging 68 cents,
according to First Call/Thomson Financial. Sales surged 83% to $2.72 billion. Great company, great results. But the stock remains in a downtrend.
Ahead of the news, shares in the chip-gear maker rose 1 9/16 to 72 1/8 on
double average volume but retreated from their session high of 74 1/2. The stock
has a long ways to go before pulling out of its downtrend. I wouldn’t consider
Applied Materials for possible long trades until it came close to challenging
resistance 98 1/2 (see Point A in
chart).Â
Drug stocks took it on the chin after an appeals court
stripped Eli Lilly
(
LLY |
Quote |
Chart |
News |
PowerRating) of patent protection for Prozac,
paving the way for generic versions two years earlier than Lilly had
previously projected.
Some market watchers are second-guessing the collateral damage to other drug
stocks and looking for a bounce. But even ahead of the news, a battle of supply
and demand was being waged over the sector. Intermediate-term momentum traders
should not line up behind a trade unless the technical evidence is lining up
behind a stock. Don’t get in the middle of a fight.
Look at American Home Products
(
AHP |
Quote |
Chart |
News |
PowerRating). Accumulation days (up days on
rising volume) are offset by distribution days (down days on rising volume). You want stocks that rise on
strong volume and pull back on light trade. Also, notice the wide and loose price swings.
I look for a price
volatility contraction ahead of the breakout in order to isolate pivot points and
stop-loss levels that don’t leave me extended in price.
