Goldman Sachs came out with a brutal downgrade of pharmaceutical company MannKind (MNKD) this morning. The stock went parabolic in late January launching from the low $5s to nearly $8, an increase of nearly 50%. Now, Goldman believes the stock is only worth less than half yesterday's closing price of $6.64. While the fundamentals -- and by fundamentals I'm talking about pipelines, subscriptions, sales, pricing of the drug more than just book value or price-to-earnings ratio -- I find this downgrade aggressive after only a few weeks of sales for MNKD's diabetes drug. This is a time where I'll look at the charts, as I think they provide a glimpse of the psychology of the market, and where we might find buyers and sellers in the near-term until more fundamentals are available for review and decision-making.
MannKind spent the winter in a very wide consolidation channel before pushing higher in early 2015. I'm not a huge user of Fibonacci levels on charts as I tend to use them in my underlying indicators, but I think they are helpful, especially when looking at a stock that runs 30% to 50% or more in a very short time frame. In this instance, I am using the bottom tick in October and top tick in February to arrive at levels. The stock has actually done a fine job trading around these levels, closing yesterday around the 61.8% area and then touching the 38.2% as the low on the day. With the stock bouncing off the lows, the $6.16 to $6.25 range becomes key. A close above $6.25 and the bulls should fill the gap easily. A close below $6.16 and we have to retest the maroon area of $5 to $5.25, which I see as major price support.
The short-term damage looks big today as we now only have $5.75 as support with the next level some 10% lower. Furthermore, we are not yet in oversold territory. If I'm playing this one today, it is only for a scalp in either direction, but unless it gets back over $6.25, I would be very cautious in the near term if I were a bull.
Peering out a bit further, the weekly chart provides a more data to consider. First, the slightly longer-term vortex indicator says the bullish trend sentiment isn't quite dead yet. There are concerns, though, as the Relative Strength Index is crossing under 50, and I used a 13-period, rather than an 8-period, range to get a better feel for long-term direction. I also pushed out the slow stochastics a bit, and they are starting to turn bearish.
It makes sense when you look at price. That winter consolidation and bounce formed a nice price channel. We are currently at the very bottom of the channel (support), so I am really keying on this RSI and stochastics. It is very possible they are leading the breakdown in price. Support, unfortunately, doesn't come in until $4.50, then $3.80. If we did see those levels, I would look at this as a very attractive risk-reward.
I did note the bearish head-and-shoulders pattern. Obviously, you can't use the head minus the neckline then subtract that from the neckline or you get a negative value. Rather, I would take the difference between the head and neckline ($11.50 - $4.50) and then divide the head ($11.50) by the result ($7). I would then take this percent value and multiply it by the neckline of $4.50 to give me my target of 2.75. Surprisingly, it maps very well to the Goldman target. In other words, a close below $4.50 on a weekly chart will bring about Goldman's $3 price target.
Overall, there are major concerns based on the charts. MNKD needs to get back above $6.25 on the daily chart to shake off weakness and get back in the channel on the weekly chart. A close on a weekly basis above $7 will eliminate that head-and-shoulders pattern as well. Again, I believe Goldman's downgrade is aggressive, but the action today has potentially damaged the charts enough for folks to starting buying into it, so I would wait for a few of the warning signs to clear before aggressively adding this one.
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