Biogen Inc (NASDAQ:BIIB) stock has been halved, as the biotech space has been under duress and the selling-pressure catalyst has been the United States presidential election. Both presidential candidates have pledged to crack down on the alleged price gouging that biotech companies have been accused of.
Regardless of who wins, it’s a losing proposition for this sector. Or is it?
The stock market has a habit of discounting public information. It is no secret that both presidential candidates have pledged to crack down on this sector, and this election may be the catalyst that finally causes this sector to bottom. This is the scenario that traders refer to as “buy on rumor, sell on news”. Only in this case, it is reversed: “sell on rumor and buy on news.”
I also have reason to believe that BIIB stock has already bottomed, and that this stock is setting up for a move higher. My beliefs are centered around how I analyze potential investments. I use price charts as my main tool to discern trends and to time entry and exit points. Stock price as a catalyst has allowed my strategies to remain systematic and disciplined.
The following chart illustrates two reasons why I think the bottom in Biogen stock has already been put in.
Chart courtesy of StockCharts.com
The first reason stems from the Fibonacci retracement numbers. These numbers are a very popular tool used by many technical traders. This tool is used to identify countertrend price objectives. In theory, when a stock price corrects from a primary trend, it will retrace approximately 50%-62% of the primary move.
BIIB stock conformed to this tool perfectly. The blue box is what traders refer to as trading into the box and, when shares fell into the box, it signaled to traders that they should cover their short positions and/or start building long positions.
Using this technique to purchase Biogen stock proved to be a winning strategy. The long position from this strategy would have generated a paper profit of 25%, if I assume an average cost of $240.00.
All great stocks that are currently sitting at all-time highs have had instances where they experienced draw-downs. Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and Facebook Inc (NASDAQ:FB) have all experienced such declines, and this was all in the context of a larger bullish trend. Sell-offs are painful, but sometimes they are needed in order to relieve overbought and excessive runs. The skepticism that is created after such moves is the tailwind needed to drive prices to new highs.
The second reason stems from the moving average convergence/divergence (MACD) signal in the lower panel. MACD is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals. This signal is suggesting that the predominant trend lower will soon be over, and that the bulls will once again be in control of Biogen stock when a bullish cross is generated.
The following Biogen stock chart illustrates the pattern that could propel BIIB stock to $400.00.
Chart courtesy of StockCharts.com
The BIIB stock chart above illustrates the health of the recent price surge. The move off of the June lows is referred to an impulse wave and, in this case, it is acting as a flagpole. The trading range that has developed is referred to as a consolidation wave and, in this case, it is acting like a flag.
If the consolidation pattern resolves in a bullish manner, the flag will act as midpoint consolidation, and the subsequent move should match the previous flagpole. If my analysis is correct, a bullish outcome would produce a measured run that will target a $400.00 handle on BIIB stock.
The Bottom Line on Biogen Stock
I am neutral on Biogen stock even though I have reason to believe that the sell-off that drove share prices lower has run its course. I am waiting for a bullish signal and resolution of the consolidation wave to confirm a bullish bias on BIIB stock.