BIIB Stock: More Than Just Rumors
Biogen Inc (NASDAQ:BIIB) stock has been the subject of buyout rumors. This has caused some price volatility, to say the least. On August 2, shares of BIIB stock surged 9.3%, based on these speculative rumors. On August 3, we saw a drop of 4.5%, as news broke that Allergan, Inc. is unlikely to pursue a takeover.
This is probably causing a lot of confusion for investors, so I am going to try and shed some light on what investors can expect from Biogen from a share price perspective. In order to do so, I am going to completely disregard the rumor mill and stick to the BIIB stock chart to generate a bias.
Here’s What You Need to Know About BIIB Stock
The first thing I like to look at is the long-term trend of a stock. BIIB stock rose from a low of $37.21 in 2008 to a high of $480.18 in 2015, before the current sell-off dragged down the share price. The low of $223.02 in June 2016 is a significant number, if you ask my friend Fibonacci.
Chart courtesy of www.StockCharts.com
Fibonacci retracement numbers (highlighted in green) are a very popular tool used by many technical traders. This tool is used to identify counter-trend price objectives. In theory, when a stock pulls back from a primary trend, shares will retrace about 50% to 62% of the primary move. This zone usually offers support as traders will be eyeing this area as an area to enter long positions, or cover short positions.
BIIB stock conformed to this tool perfectly. The blue box is what traders refer to as “trading into the box.” When shares fall into the box, this signals traders to cover on their short positions and start building a long position. Using this technique to purchase shares proved to be a winning strategy. The long position from this strategy would have generated a paper profit of 30%, if we assume an average cost of $240.00.
The long-term trend from a Fibonacci perspective is bullish. Let us take a gander at the short-term chart of BIIB stock to see if anything stands out.
The following short-term chart is a sight for sore eyes. It contains a rare island reversal pattern that was confirmed by a continuation gap. These are indeed exciting times.
Chart courtesy of www.StockCharts.com
An island reversal pattern consists of two gaps—an exhaustion gap (gap down) and a breakaway gap (gap up)—that occur at the same price level. The island is created as the price action between the gaps is isolated. In a bullish reversal formation, the pattern is significant because all the short sellers who initiated positions after the initial gap down are trapped—or, as the pattern suggests, stuck on an island.
These short positions in BIIB stock are now all underwater and need to be covered at some point. Losses amounting from shorting a stock are unlimited, as there is no limit to how high a stock can trade.
The continuation gap appears as BIIB stock breaks through resistance. This level is where the exhaustion gap initiated the island reversal. Continuation gaps often occur at the halfway point of a trend. If we assume this notion, then we can generate a target price. Without going too deep into the logistics, we get a target price of $370.00.
The target will remain in force as long as BIIB stock doesn’t fall back and close below $285.00. A close below this level would essentially bust the current setup, and imply bearish implications.
The Bottom Line on BIIB Stock
The rumor mill may have temporarily put a damper on the share price as Allergan denies a buyout.
Do not let that sway you; the price charts are still pointing to higher prices in the interim. The island reversal and the continuation gap are both picture-perfect. The latter confirms the former and casts a bullish bias with a primary target of $370.00.
If anyone were to ask my opinion on BIIB stock, I would answer with the following: “I am pretty sure there is treasure on that island.”