Watching For Biotech Resistance
Cell Genesys shares surged on powerful
volume Wednesday after the biotech announced a high success rate in treating
cancer tumors in rats. The stock appears to be basing, but as I trader, I’d
watch out for overhead supply.
Before the open, the Foster City,
Calif.-based company
(
CEGE |
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PowerRating) said that, in collaboration with German partner GPC Biotech
AG, it had developed a gene therapy called p27/p16 which killed multiple human
cancer cell types in pre-clinical studies. The p27/p16 therapy killed tumor
cells without affecting surrounding healthy tissue.
In response to the news, Cell Genesys
shares jumped 3 11/16 to 26 3/4, crossing their 50-day moving average on more
than triple average volume. The stock is behaving well after having taken part
in the biotech carnage earlier this year. The company has a great story.Â
However, as an intermediate-term
momentum trader, I avoid stocks that have not surpassed their mid
levels following corrections. Cell Genesys does not qualify. Its mid
level — the half way point between its March 2 high of 61 3/4 and its April 17
low of 13 5/16 — now stands at 37 17/32. I would not look for entry points
until after the stock had cleared that level.
For long trades, I shun stocks that
are priced below their mid levels on the assumption that they are weighed down
by too much overhead supply. Overhead supply is the amount of shares in
the hands of shareholders with paper losses. These weak
holders tend to sell into, and thus thwart, rallies. You can find a stock’s mid level by
adding its pre-correction high to its post-correction low, then dividing the sum by 2.
Cell Genesys has passed two other
tests for overhead supply. It has cleared both its 50- and 200-day moving
averages. Much of the progress since June has come on strong volume. That kind
of turnover presumably should help ease the problem of overhead supply. For a
riskier trade, you could try to play a break out above resistance at 34 9/16
(see Point A in above chart).
It was a good day for biotechs and, in
particular, the genomics niche. But a number of these stocks still face
resistance level tests after having overshot their recoveries. Check out Human Genome Sciences
(
HGSI |
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PowerRating), which Wednesday rose 5 9/16 to 138 1/16. Notice how volume surged
when shares in the gene-mapping company peaked at 187 1/2 on July 11 (see Point
A in following chart). The volume spike
adds authority to that resistance point. It represents more shareholders who
hold paper losses from the stock’s decline below that price level.
