Bristol-Myers Squibb (NYSE: BMY) was one drug stock that bucked the trend in September with a much stronger rebound than its peers following the broader market's breakdown in late August. While the pharmaceutical sector index formed a rising wedge pattern, which is typically bearish, from its late August lows, BMY scooted sharply higher.
Still, I believe the real driver for the decline was overall weakness as many market and sector indices broke down.
Regardless, this bearish reversal ended BMY's defiance of its sector's foibles on the charts. The stock could not hold above its major moving averages. As prices hit resistance set by the ragged bottom of the mid-2015 trading range, the bears took over.
The next downside stop is the $57.50 area, not far below current trading. This marks the November and December lows, as well as the twin highs from January and March of 2014 (not shown on the chart), setting a nice floor for the stock. The rising trendline from November 2012 will also be in this area within a day or so. Recall that the broader market started a multimonth rally in November 2012, so this trendline is rather important.
Should this support level fail to hold -- and given the overall weakness in the market it seems quite likely that it will -- the downside objective would be much lower. A breakdown would target the trendline from the start of the bull market in 2008 in the $50 area. There is also horizontal chart support there from the trading range seen late last year.
Recommended Trade Setup:
-- Sell BMY short at the market price
-- Set stop-loss at $66.50
-- Set initial price target at $57.50 for a potential 7% gain in two weeks
-- Set secondary price target at $50 for a potential 19% gain in six weeks