Hefty Action in a Pair of Biotechs

 | Jun 27, 2012 | 9:30 AM EDT
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Some of the Nasdaq's biggest upside movers Monday in heavier-than-normal trading volume hailed from the biotech area of healthcare.

As I've often written here, it's worth tracking such stocks in a poor market, as they could be setting up for more price gains when a new uptrend is defined. Generally I run scans for companies that are showing double-digit earnings growth, driven by rising revenue.

But, with many of the biotech names, it's possible to unearth strong technical contenders from the ranks of companies that are yet to turn a profit. That's because, in this industry driven by research and development, it's very typical for companies to be dependent on additional rounds of capital in order to stay in business. That tends to apply until one of their products is a hit, or -- as is often the case -- the company is acquired.

One such unprofitable name with a strong chart is Synageva BioPharma (GEVA), which specializes in treatments for viral conditions. In November, the company completed its $35 million acquisition of Trimeris, maker of anti-HIV drug Fuzeon. 

After a 137% rally between Nov. 4 and Jan. 31, the stock retreated into a consolidation. Similar to the rest of the market, the stock has struggled of late. It attempted a breakout in late April, around the time the major indices went into a failed rally attempt. Most stocks trade in tandem with the broader market -- so, unsurprisingly, Synageva fell back into a base.

The stock's consolidations have been constructive: The latest pullback formed a double-bottom pattern, which is often a bullish precursor to further price gains. The stock cleared that base in heavy volume on Monday, but retreated slightly in Tuesday trade. Monday's 5.8% price move, to a new closing high of $40.74, followed Cannacord Adams' initiation of the stock with a rating of Buy.

I don't make macro predictions about what may or may not affect markets, but it's fairly obvious that there are plenty of developments in the coming days with potential to move the market one way or another.

With the European Union summit looming in the coming days, along with a Supreme Court decision on healthcare, the next several sessions have potential to show reactive action. In any event, news and economic developments have proven to be catalysts that send stocks into whipsaw action. Given that, I'm staying on the sidelines in the current market environment until a trend -- whether up or down -- is more clearly defined.

Another big mover from Monday, and one that's still working on a constructive base, is another biotech: Spectrum Pharmaceuticals (SPPI). This company develops products for oncology and urology treatments. The stock began consolidating January, and it has been attempting to etch the right side of that downturn since April. 

This is a stock that historically has rallied to further highs after clearing areas of consolidation. As of now, a possible entry point could materialize as the stock surpasses resistance at its prior high of $16. However, an opportunity could present itself at a lower price -- for example, if the stock forms a handle area before it rallies as high as $16.

While this company has been in rally mode lately, buyers could get caught in a bout of selling that pulls the stock below its purchase price. While there seem to be many tempting opportunities right now, I'm content to preserve capital and wait for a clear trend to emerge.

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