BMY Stock: Teetering on the Edge
Bristol-Myers Squibb Co (NYSE:BMY) stock dropped 16% after news broke that their cancer drug “Opdivo” failed a study that would have expanded its use in lung cancer patients.
The stock price gapped lower as the news disseminated outside of regular trading hours. The news caught many off guard, and sent many scrambling. Analysts were quick to respond with rating downgrades while others were reaffirming and supporting their current position. Confusion reigns as bulls and bears fight for positioning.
The fallout from such news is very hard to measure, and can be very subjective. I always use the price of a stock and the trading action to help me understand the weight of the news that has just been disseminated. I assume that the reaction of the investing community after the news broke, and the follow-through of share price, is the single-most important indicator in assessing the weight of the new information that has graced the headlines.
The following chart illustrates the gap down in BMY stock after the news broke.
Chart courtesy of StockCharts.com
A gap is a change in price from the preceding close to current opening price. BMY stock closed at $75.32 on August 4 and opened up at $62.00 on August 5. This gap appears very large on the chart; a large gap is telling me that the news was indeed significant.
There are many different types of gaps that traders use as a signal to help decipher trends. The different possible types for this example are breakaway or exhaustion gaps. These gaps occur at the beginning or at the end of a defined trend. The trading action can help decipher which type of gap it is, and that depends on how share price will follow through.
The 2016 year-to-date low is sitting at just under $58.00. Bulls would like to see the level hold, and are hoping for a bounce higher in an attempt to fill the gap. If BMY stock can fill the large gap, then the gap in question was an exhaustion gap. If support fails, and BMY stock follows through on the downside, then the gap in questions was a breakaway gap.
The following chart illustrates the importance of the current support level.
Chart courtesy of StockCharts.com
Since the lows in BMY stock post the financial crisis, shares have traded within a well defined ascending channel.
There are two parallel lines that define this trend. The pattern is known as an ascending channel. An ascending channel has two trend lines that define the upper and lower bounds. Share price oscillates between these two lines for as long as the trend permits. A trend reversal occurs when shares finally gather enough strength to break out from the channel.
At the current juncture, it appears that the ascending channel is broken. It is important to note that the chart is using a monthly scale, so in order to confirm a break below the ascending channel, the price needs to close below the trend line at months’ end. If BMY stock closes below the lower trend line that has been acting as support, it will confirm that the gap was a breakaway gap.
Breakaway gaps rarely get filled and almost always signal that new trend has started. I will have to wait for August to conclude to confirm that a trend reversal is indeed at hand.
Bottom Line on BMY Stock
The news surrounding BMY stock is significant. It has placed the stock in a precarious position. Support must hold for the bulls to have any hope of regaining a foothold. A break of support would indicate further downside and would be a triumphant signal for the bears. I am leaning towards the bearish camp, awaiting confirmation from the month-end close and the year-to-date lows.