Sometimes we need to look back in order to look ahead. Esperion Therapeutics (ESPR) was the talk of many traders Tuesday. I mentioned it as a gap-up trade name, but it pushed much higher than even I foresaw, topping out just over $100 and finishing the day up about $22.50. But before we dig deeper into ESPR, I want to look back at Bluebird Bio (BLUE) because I see similarities -- not in their drugs, but in what is playing out.
BLUE saw a huge jump in early December after updating data on drug trial, as the stock soared to $85 from $50 in a single day. One week later the company raised money through a stock issuance similar to what ESPR proposed Tuesday. While some might not like the idea of dilution, if you've ever looked at the cost of a Phase III trial or post-approval work, you'd see exactly how cash-intensive these can be. Cash is the lifeblood of the companies as much as a drug. A cash infusion allows the company to operate from a position of strength, especially when looking for partnerships with big pharma. Make no mistake; this is a big positive and smart management. It also helps to create support for the stock price.
The stock never violated the lows from the Dec. 15 pricing of the $85 follow-on offering. In fact, the test of that level in early February was a fantastic buying opportunity. Furthermore, the stock somewhat needed the offering "overhang" as a huge move like this often needs consolidation if the next leg higher will stick. Sure, we may see a continued push, usually in the form of a squeeze, but those are more like fireworks shooting higher into the sky, dazzling in flight right up until the time they explode and fall back to Earth.
As far as ESPR goes, we had a similar type of move Tuesday immediately followed by the company offering a follow-on offering. Now we want to see consolidation with the offering price holding steady as the low. The stock, based on the daily chart, has had periods of consolidation in the past. These were generally marked by a 13-period Relative Strength Index coming down from an overbought signal and/or the shorter-term slow stochastics seeing a bearish crossover while in overbought territory. It isn't quite there right, but it's getting close. I wouldn't write off a bit more of a push higher first before seeing consolidation. I expect a decent size discount on the offering, but it will offer solid information to use in future trading.
Going out a bit further in time and checking the weekly chart of ESPR, the 10-week moving average has clearly been nice support. While I would love to buy the stock at these levels, we're more likely to wait for the moving average to catch up to price than for price to move down significantly and meet the MA. For now, I'd hesitate chasing, but I don't see a valid reason to short it. If anything, be patient in your bullishness, but don't be ignorant of the strength of this current move and fight the market simply because it "went up too much" yesterday. That's a losing strategy and it will put you in the poor house. With an offering coming up, there should be a better risk-reward opportunity for those willing to be patient.
Can you beat TheStreet ... at basketball? Jim Cramer and our Wall Street pros are posting their brackets on ESPN. Take them on at www.thestreet.com/espn, password: Thestreet2015