When Accumulation Turns To Distribution
Positive corporate news at Andrx Corp.
ran smack into the bear Tuesday. The result: While the stock gapped up and
closed up, it finished the day at the bottom of an expanded range. That spells
distribution in my book. The odds favor more trouble ahead for this stock.
Shares in Andrx
(
ADRX |
Quote |
Chart |
News |
PowerRating) gapped and
rose on news of a pact with a rival generic drugmaker, Genpharm, that protects
Andrx’s receipt of the bulk of the profits from the first generic form of
Prilosec. Andrx said that Genpharm has acknowledged that Andrx was the first
company to seek U.S. marketing approval for AstraZeneca’s heartburn pill. The
drug generated U.S. revenue of $4 billion and $6 billion worldwide in 1999.
The stock gapped up, then advanced
higher to a session high of 71 1/8, an intraday gain of 23%, but lost its
footing, closing at 65 9/16, up 13% but near the bottom of the day’s base.
Volume swelled to 3.1 million shares, three times its usual trade.
Despite closing up in a down market,
the picture to me is one of a distribution. For the past nine weeks, stock’s on balance
volume has run well off parity. In other words, the volume of trades consummated on
up-ticks has lagged the volume of trades on down-ticks.
As I pointed out in my new lesson,
a decline near the bottom of a day’s range can negate a session as an
accumulation day. At the very least, such action throws a cloud of doubt over an
accumulation interpretation.
Short-covering, rather than bullish
buying, may have played a role in the initial rally. Andrx had two days’ worth
of
interest going into the rally. The company is engaged in several acquisitions.
Some of the short interest may have represented shorting against the box by
shareholders in the to-be-acquired companies, hedging against a decline in Andrx
shares. This is speculation on my part, but it’s logical to suspect some
arbitrage-related short-selling in Andrx and, as result, short-covering by the
arbs.
The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. 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.
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,
check out the Money
Management area of TradingMarkets’ Stocks Education section.