BIIB Stock: Unexpected Sell-Off
Biogen Inc (NASDAQ:BIIB) stock is down 5.91% on the back of news surrounding a clinical drug failure from one of its competitors, Eli Lilly and Co (NYSE:LLY). Even though this news is not directly related to Biogen Inc, investors in BIIB stock fear that that Biogen could have similar problems with their own Alzheimer’s disease treatment.
It is actually quite daunting that Biogen stock is down today because I was planning on writing a bullish piece on BIIB stock. The price chart was becoming quite compelling, and I was expecting a significant movement in the price. My initial impression was that the pattern I was looking at was going to resolve to the upside.
My expectations were based on the fact that Biogen stock and the biotech sector are slowly becoming more bullish, as the bearish headwinds that began in early 2015 are starting to subside, and the bullish tailwinds are starting to swirl. This downside move is very surprising, to say the least.
The following chart illustrates why I was looking for bullish setups in BIIB stock.
Chart courtesy of StockCharts.com
The Fibonacci retracement numbers are highlighted in green on the BIIB stock chart above. 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. Traders refer to this retracement as “trading into the box,” and it is highlighted in blue on the chart above.
Traders use the box as zone to cover their short positions and/or start building long positions. The theory behind Fibonacci numbers is that, once the retracement is complete, the predominant trend will reassert itself and a new bull market will commence.
The moving average convergence/divergence (MACD) indicator is converging, and a bullish cross would support a new bull market in BIIB stock. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals. A bullish cross would suggest that the predominant trend lower has officially ended and that a new bull market has commenced.
For a trader, this means that the bulls are once again in control of Biogen stock, and one should be on the lookout for bullish setups.
The following Biogen stock chart illustrates the setup I was watching, and I was dismayed when it failed.
Chart courtesy of StockCharts.com
Bullish setups consist of impulse waves that take a stock price higher, and consolidation waves where the new higher prices are digested. Consolidation waves are essential in a setup pattern because they alleviate any overbought conditions, and act as an area where new momentum can be stored that can be released upon a breakout.
A breakout occurs when the pattern is completed. This requires the price to move above or below the trend lines that make up this pattern.
The consolidation wave in the chart above was in the form of a pennant and, on average, these patterns are continuation patterns. A trader can use this pattern to project a potential price objective because, on average, these patterns occur at midpoints and are sometimes referred to as midpoint consolidation patterns. The theoretical price objective of a bullish breakout would have been $370.00 in BIIB stock, but that has been put to rest at this moment.
There is still some solace for the bulls. This sell-off was not caused by a company-specific event, and perhaps the bulls have enough strength to fill the gap and shake off this news.
Bottom line on Biogen Stock
The sell-off in Biogen stock is concerning, considering I was looking for a bullish resolution to a consolidation wave because I had reason to believe that bullish tailwinds are starting to pick up as the bearish headwinds are beginning to die down. If BIIB stock can fill the price gap it made this morning, it would reinvigorate my bullish view.