Spectrum Pharmaceuticals (SPPI) is forming a pennant of higher lows and lower highs. Technically, we don’t want to see lower highs, but when the trend is up over the past few months, this combination forms a pennant and is favorable for more upside. It seems to be settling near the bottom of the trading range on low volume which is near key support of the 50-day SMA and a place I have started buying. This presents a favorable trade setup towards at least the top of the trading range in white and a retest of the 52-week high as I tend to take some off near resistance and if resistance is broken on good volume, I quickly add back on the breakout. Due to the solid accumulation over the past few months, look for another retest of the 52-week high of $7.25 that finally breaks resistance else the downside can be limited with a relatively tight stop loss somewhere under the 50-day SMA to ensure its not prematurely hit.
SPPI has solid cash on hand, per yahoo finance, of about $85 million with only about $50k in debt. The shorts have about a 6 day cover at current volume which is about 9% of the float. We have an upcoming earnings announcement that is currently unconfirmed for a premarket release on March 14th. I tend to reduce positions going into earnings, but the way the chart is setting up and barring any negative news releases, I’m cautiously optimistic we will see higher prices to profit into this week.
For catalysts, SPPI has an FDA decision in 2Q 2011 for a colon cancer drug FUSILEV. While chatter seems to be that this drug is likely to be approved this time around, my style of trading never gambles on that unless it’s with only profits OR favorably priced straddle options. Also, we have about 14 days left for the response letter from the FDA in regards to the ZEVALIN label. This response letter is likely to create some volatility, but I anticipate it will be minor compared to the FUSILEV FDA meeting as even a negative letter response may find bullish support due to the longs holding for the FDA meeting in 2Q. Utilizing reasonably tight stop losses near support levels, we have good potential for upside gains even without a breakout. However, the chart creates favorable odds for a breakout and biotech stocks many times ignore uncertainty in the markets, which we are currently seeing and will likely see more this week, so it presents a safer haven when used correctly.
Again, be careful holding into FDA meetings as we saw in Protalix BioTherapeutics (PLX) and earnings reports even though earnings should see good support due to the FDA meeting catalyst. You lose your edge when you hold into these meetings which significantly increases your risk. As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was Long SPPI but positions may change at any time.
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