The Printout on Organovo

 | Feb 21, 2014 | 9:30 AM EST  | Comments
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Stock quotes in this article:

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Organovo Holdings (ONVO) has been a popular position for me and for many of my colleagues over this past year. The company is on the cutting edge of 3D bioprinting technology, winning over many investors with its research and development of functional human tissues and organs. Since mid-November, however, the stock has been trading in a range just off its highs. This leaves many traders and investors pondering whether Organovo has another run on the horizon.

Before answering that question, let's first look back at what we saw in Organovo last year from a technical standpoint and how it relates to the current price development.

Source: TradeStation

The chart above shows the price action unfolding in Organovo last fall. The technical pattern on the weekly time frame was a well-developed triangle with declining volume that was starting to hug the upper limits of the triangle's channel at $6 per share. I first shared several videos on Organovo in September 2013 for those in my Friday trading group and began to build a position on Oct. 1 into the Oct. 16 with an average price of $5.80 as it was congesting along these levels. At the same time, it also caught the attention of fellow contributor James "Rev Shark" DePorre, who added it to the Best Ideas list on Oct. 6.

Source: TradeStation

As seen in the monthly chart above, Organovo had a high of $10.90 in 2012. Increasing momentum made a retest of this zone very likely on a breakout. Nevertheless, I aimed a bit lower for my initial target. I used the 100% expansion level based on the July rally. This left me watching the $8.50 level very closely. As momentum increased into this target level, however, I increased my expectations as well to $10 per share. Organovo, however, was unfazed by its prior highs and had an even more ambitious target in mind. It wasn't until early January that the stock finally began to display intraday trend exhaustion. At that point it was toying with highs over $13 per share.

When Organovo initially corrected off its high last July, it did so very swiftly before falling into a period of congestion lasting until October. When the October-November rally finally began to correct, it also did so very swiftly. In fact, the reversal was even more rapid than before. In less than three days, Organovo fell more than 5.5 points to $7.93 from $13.65.

When Organovo once again finally found its footing, it had retraced to the 61.8% Fibonacci retracement level based on a pullback into the lows of the July-October congestion. This was the exact same retracement level Organovo had hit coming off its July highs before falling into the congestion that formed between late July and mid-October.

While not identical, a lot of the price action that has followed November's correction has also played out in a manner quite similar to the congestion last fall. Even the time development, shown below in red, is nearly identical.

Source: TradeStation

Price action in the market tends to repeat itself. This has many traders looking at the current development in Organovo as a yet another buying opportunity. I do agree that the potential is certainly there for another break to the upside. Organovo shares are again hugging the upper limits of its recent trading channel and volume has declined as that channel has developed. Both traits are quite bullish; however, there are a few reasons to be more cautious this time around.

First, the October-November rally was the third major rally Organovo has experienced since reversing off lows in 2012. This typically exhausts a trend.

Second, the third rally was also the strongest. This will make a strong continuation on par with the October-November prior rally more difficult.

Third, the second wave of correction last month, which took place within the current channel, was stronger than the second wave of correction within the prior range from the second half of August 2013 into the first half of September. This has created a weaker trading channel than before and will also make a strong continuation move on the upside more difficult.

Finally, the fourth-quarter rally mirrored the rapid uptrend that took place in the first half of 2012. Although the most recent corrective phase is comparable to the prior one last fall, the 2012 correction and the one that took place in the first half of 2013 both took approximately six months. Similar impulse moves on the uptrend often need similar corrective stages. This means that any breakout prior to June will struggle to clear the prior high without first pulling back into the larger trading channel.

While Organovo looks attractive again on the daily time frame, the cons I've listed here will lead me to approach this security with a shorter-term outlook on any new position and the 90-minute chart as a guide. As that unfolds, I will then decide whether it will be worth the risk to hold part of the position for larger gains. For now, the next 90-minute resistance zone to watch will be $11.50-$11.80, which is just shy of the prior daily high.

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