Identifying a Biotech Setup

 | Jun 28, 2013 | 9:00 AM EDT
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I still remember when my first boss on Wall Street was ripping a new trader for not being able to give a reason for the trade he had just taken. His point was that taking the trade was OK, but if you can't explain why you are doing so, you have no excuse to be in it since then it's just a Vegas crapshoot. 

We all know the house has the edge in Vegas. Are you running a business or are you gambling?

With the way I use Fibonacci price and time relationships, I like to give you some clear reasoning for my trades. I also want to define in advance when I would consider the trade a bust. Not all the trade setups will work out because no system is 100%. The good news is that the risk can be clearly defined, and when one does play out to the target, it's a beautiful thing. 

Here is my setup in Regeneron Pharmaceuticals (REGN). On the daily chart below, I have identified six Fibonacci time cycles that came due between June 24 and 27. When I see a cluster of timing cycles (three or more) I watch for a reversal of whatever the market is doing into that time window. Since REGN was trading lower at that time, the cycles indicated that the odds for a reversal to back up were higher than usual.

REGN Daily

First, the actual low in this case was made at $206.30 on June 24, which was directly within this time window. Second, there was also a beautiful Fibonacci price cluster where that last low was made. The cluster zone came in between the $203.75 and $206.28 area. This zone included a .618 retracement of a major swing (illustrated on the chart above), a 1.618 extension of another swing and a 100% projection of a prior swing down:

  • A .618 retracement Feb. 21 low to the May 15 high
  • 1.618 extensions June 5 low to the June 7 high
  • 100% projection May 15 high to the June 5 low projected from the June 7 high.

We are already seeing a healthy rally off these time and price parameters, so you might question why we are looking at it now. Well, if this last low is more important in the bigger picture, the upside potential for the trade is the $305.12 area. It is currently on top of a hurdle as far as resistance at the $324.41-$240.57 area. My strategy would be to look for a pullback to the recent low made on June 24 for a buy entry with the risk then defined below the June 24 low.

I will typically look for a retracement between 50% and 78.6% and then watch for a buy trigger to fire off an entry. A relatively low risk options strategy might be the best way to go with this one. Bottom line: I will consider myself wrong the trade if the June 24 low is taken out.

For more information on trades and triggers please click here.

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