BIOS Stock: Backtests Are a Trader’s Best Friend
When using technical analysis to determine the merits of an investment, there are a countless tools and strategies that someone can employ to their advantage. Characteristics found in the price action are among my favorites.
For instance, backtests remain one of my favorite types of price action.
In a bull market, a backtest occurs when a stock returns to test a previous level of price resistance. Once this test is complete, the previous level of price resistance becomes a new level of price support, and higher prices tend to prevail.
The reason I’m so fond of this price action is that backtests provide an optimal point to enter a stock.
For example, BioScrip Inc (NASDAQ:BIOS), a healthcare stock I have been bullish on since November 2018, has just completed one of these famous backtests.
The backtest I am referring to is captured on the following BioScrip stock chart.
Chart courtesy of StockCharts.com
This BIOS stock chart highlights the development and completion of a technical price pattern known as an ascending triangle.
An ascending triangle is a powerful pattern characterized by a static level of price resistance accompanied by a series of higher lows.
The contraction of the range created by this price action is what makes triangle price patterns powerful. The stock price’s inability to sustain a directional move in either direction causes energy to build within the pattern. This energy is released once the stock price exits the pattern.
An example of this energy being unleashed occurred on November 26, when Bioscrip stock broke above price resistance that resided at $3.30. As shown on the chart above, this completed the ascending triangle.
That resulted in a powerful move wherein BIOS stock closed higher by 16.4% on the day. This event suggested (and continues to suggest) that higher prices are on the horizon.
Entering a position the day of the breakout or the day that followed was not exactly optimal, because the BioScrip stock price appreciated by a substantial amount once the energy contained within the pattern was released.
Entering a position in BIOS stock when it was backtesting the previous level of price resistance at $3.30 was the optimal point. From a risk/reward perspective, this is where risk is minimized, because this is also the level where the pattern is least likely to fail.
Aside from being the most optimal point to enter a trade, backtests also act like springboards. After price support has been established, an accelerated move toward higher prices has been known to follow.
My initial price objective for this stock is $5.80. That price objective was formulated using the following chart.
Chart courtesy of StockCharts.com
The above BIOS stock chart illustrates that the deepest part of the ascending triangle measures $2.40 in length.
This number is important because, in order to formulate a price objective, I took this value and extrapolated it above the significant level of price resistance that contained the stock price since October 2016. This is how I came up with the $5.80 price objective.
That is the linear-based price objective suggested by the completed price pattern. I could have also generated a log-based price objective with the same method, using percentage change instead of dollar amounts.
The log-based method formulates a much higher price objective. For simplicity and argument’s sake, I am going to use the linear-based price objective as my initial price objective for BioScrip stock.
When and if this level is met, I will re-examine the situation and assess whether a log-based price objective is the next plausible objective.
I am maintaining my bullish view on BioScrip stock because it has just completed a backtest.
This backtest is reaffirming the implications of the price pattern that was completed in November 2018, which are that BIOS stock is geared for higher prices.