Tuesday, June 4, 2013

ALXN: A chart and bear signal disconnect

Alexion Pharmaceuticals Inc. (ALXN) produced a bear signal amid a comparatively shallow correction within a persistent long-term uptrend. That's not to say that the correction might not eventually lead to a downtrend, but it is far from being there at this point.

ALXN began its rise in 2009, in company with many stocks as the recovery from the Great Recession crash took hold.

In the ensuing four years it has corrected, of course, but in contrast to many stocks, none of the corrections came close to bringing the weekly-chart uptrend to an end.

The correction that began from $119.54 in October 2012 began as the steepest of them all, five solid weeks of unrelenting decline that finally bounced from $86.20, only to retrace to yet a lower low, $81.62 last February.

It's what happened next that provides the disconnect between the signal and the chart. The price began to stairstep upward in a series of higher highs and higher lows, hitting a correction peak of $108.13 on May 13 before falling again.

The bear signal given on Monday was followed by an intra-day low of $91.94, which is above the prior low of $88.86. And the price today, while confirming the bull signal, has failed to set yet another low.

The daily-chart pattern can reasonably be interpreted as an incipient reversal rather than a downtrend. And of course the weekly chart, while correcting, remains in an uptrend.

Just based on the charts, my anomaly alarm is ringing furiously, telling me not to take this trade.

Yet, ALXN has good odds of a successful bear trade. This is the third bear signal since the correction began in October 2012. Both of the prior signals were profitable, with an average yield of 6.5%. There were four bull signals during that period, none of them profitable.

The odds are very much at odds with my reading of the chart.

ALXN was one of four bear signals to survive my initial screening. (See "Tuesday's Prospects" posted last night.) Two of the symbols, MDP and MATX, had insufficient open interest on options to meet my criteria.

A hedged options position on MLNX was doable, but barely so. MLNX had an ambiguous chart that was more bearish within an uptrend than ALXN's and also showed good odds of success to the bear side. The main issue with MLNX was its lower liquidity.

Alexion, headquartered in Cheshire, Connecticut, developed a drug use to treat several diseases of the circulatory system that result in the destruction of red blood cells and is researching ways to stop the immune system from attacking healthy tissue.

Like all pharmaceutical companies, its financial health and stock price are at the mercy of the Food and Drug Administration, which has the power to overturn expectations or to power profits and the stock price to new heights with a single regulatory ruling.

Analysts are looking on the glass-half-full side in their expectations for ALXN. Their opinion collectively works out to a 53% enthusiasm rating.

The financials buttress that bullish narrative. Alexion reports a 21% return on equity, and long-term debt is quite low, at only 5% of equity. By my definition that amounts to a growth stock.

The company has been profitable for at least the last 2 quarters, and with two minor exceptions, each quarter has been more profitable than the last. Each quarter has surprised to the upside.

Institutions own 95% of ALXN's shares, and the price has been bid up to a high level: It takes $15.17 in shares to control a dollar in sales.

ALXN on average trades 1.1 million shares a day, sufficient to support a moderate selection of options strike prices with open interest running to two and three figures.

I normally require three-figure open option for my vertical credit spreads, and that would work with ALXN, whose call options that would be the vehicles for such a play to the bear side all have open interest above 100.

Open interest on front-month at-the-money puts is 3.6%.

Implied volatility stands at 36%, slightly above the mid-point of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $83.52 and $103.06 over the next month, for a potential gain or loss of 10.5%, and between $88.60 and $97.98 over the next week.

With 10 hours to go before the closing bell, options trading is tilted heavily toward the bull side. Call options are trading 51% above the five-day average volume, compared to only 31% of the average for puts.

The fair-price zone on today's 30-minute chart runs from $94.03 to $95.45, encompassing 68.2% of transactions surrounding the most-traded price, $94.84. The opened at the top of the zone and has declined steadily until it is now trading below the zone, indicating a lack of very near term upside momentum.

Alexion next publishes earnings on July 22.

Decision for my account: ALXN has given a valid bear signal, and the odds buttress the case for a bear trade. But I'm passing on it. Everything else about ALXN, from the charts to the financials, screams "Bull play!"

A decline below $88.12 followed by an upward reversal than turned back down somewhere below $108.13 and then continued on to a lower low would make the bearish case easier to make. In my mindset, the chart always trumps the financials.

But ALXN isn't there yet, and so won't be a trade for me today.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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