The biotech sector garnered
headlines as it plunged this week, but big pharmaceuticals stocks were
hit just as hard. Most have similar patterns to the broader market
indices. In other words, they have renewed their downside breaks.
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.
The stock even managed to poke its head above both its 50-day and
200-day moving averages. Considering the total breakdown across most
sectors of the market, that was rather impressive.
But the good times ended abruptly with a bearish reversal on Sept.
21, the day presidential candidate Hillary Clinton tweeted she would
release a plan to tackle rising drug prices the next day.
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
