200% Gains In This Sector

| December 23, 2009 | 0 Comments

It’s kind of like being a home run hitter in baseball.  You’re swinging for the fences a lot of the time.  Maybe you’ll strike out more than others.  But sometimes you’ll hit a home run with the bases loaded in the bottom of the ninth.

It’s one industry where you can catch unbelievable profits.  Sometimes you’ll get a winning trade that makes the whole trading year worthwhile.  The biotech industry is a place where you can invest a relatively small amount of money and reap an unbelievable windfall.

Let me show you what I mean…

Take a look at Dendreon (DNDN).  In early April, they announced their one and only product, Provenge, “significantly” prolonged survival in men with advanced stage prostate cancer.  The news caused an explosion in DNDN shares.

You could have bought DNDN at the first sign of interest on April 3rd.  News that day revealed Provenge was given “late-breaker” status at the American Urological Association annual conference.  This status means clinical trial results are potentially important.  This gave the stock a nice pop on April 3rd.  The large volume day confirmed it.

It was a tip-off for big news to come…

On April 14th, the company revealed their product had positive results in clinical trials.  This is big news because it provides a basis for potential FDA approval of the drug.  The news sent the shares surging up nearly 200% overnight.

Any good technical trader would be taking profits on the morning of the 14th.  Gains like this are nothing to shake a stick at.

If you weren’t taking profits that morning, you knew something fundamental about the company and expected further upside.  You eventually got it as the shares are currently trading around $26.  But as you can see, it was an awfully bumpy ride…

But there’s a problem using pure technical analysis to trade biotech stocks…

Many of the big moves in biotech stocks are news driven.  This makes using technical analysis much more challenging.  When movement in the stock is driven by news, it’s much harder to get an edge.  You can’t see the technical shifts in supply and demand.

As you may know, I am a big proponent of having an edge.  Without this statistical advantage, your results may suffer over the long run.

Another challenging aspect to using technical analysis to trade biotechs is risk control.  Using the DNDN example above, the news of the 14th of April could have just as easily been negative.  DNDN could have opened down 50% the next day.  A situation like that makes it hard to cut your losers short and let your winners run.

Now, I’m not going to say it’s impossible to trade biotechs using only technical analysis.  I’m sure there are traders who do it.  But there are lots of issues making it very challenging.

So what does that mean for biotech traders?

It means you can’t rely on technical analysis alone.

You’ve got to throw in a large dose of fundamental analysis too.  You have to dig up research on drugs in the “pipeline”.  You need to look for companies moving drugs through clinical trials.  Researching small biotech companies ripe for takeover is a good idea as well.

You need to do a lot of research to come up with a tradable conclusion.  Your research of the fundamentals is now your edge.

But don’t let that discourage you…

Anyone willing to do in-depth fundamental research mixed with technical analysis can reap spectacular results.  So don’t shy away from investing in biotech…. Just make sure you do your fundamental research too!

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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