What To Make of These Overbought Biotechs

A couple months ago, Schaeffer's Senior Quantitative Analyst Rocky White examined a handful of technical indicators to determine which ones work best. His conclusion, based on the numbers, was that the 200-day moving average and the 14-day Relative Strength Indicator (RSI) have been the most predictive of future price action.

In that vein, we decided to take a look at stocks that have been lodged in overbought territory for at least four straight days -- that is, their RSI has been north of 70 -- and may be vulnerable to selling. A look at the table below -- which comes courtesy of White -- reveals a number of biotech stocks on the overbought list, including Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Celgene Corporation (NASDAQ:CELG), and ImmunoGen, Inc. (NASDAQ:IMGN).

As you can see above, ALXN has been in overbought territory for the past eight sessions, and currently boasts an RSI of 76. This is mostly the result of the stock's rapid upside move. Since its June 9 close, the shares have soared 28% to trade at $203.28 -- and yesterday notched a record high of $208.88.

With the company due to report earnings next Thursday morning, option traders have been upping the bearish ante. Specifically, over the last 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 2.13 Alexion Pharmaceuticals, Inc. puts for every call -- a ratio that ranks just 3 percentage points from an annual high. In other words, traders have been initiating long puts over calls at a near-extreme rate recently, suggesting they'd welcome a pullback from the outperformer.

Meanwhile, CELG's RSI has been above 70 for six straight days, and currently checks in at 82. Perhaps this explains why -- even after yesterday's earnings beat that boosted the equity to an all-time peak of $140.72, and receiving no fewer than six price-target hikes overnight -- the stock is off 2.1% at $136.13. The momentum may simply be starting to ease after a rapid run-up, which included a massive mid-July bull gap on news of the firm's Receptos Inc (NASDAQ:RCPT) buyout agreement.

Option traders have been rushing to Celgene Corporation's bullish bandwagon. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio checks in at 2.59 -- higher than four-fifths of similar readings recorded in the last 12 months. Analysts have been excited, as well, with 80% doling out "buy" or better ratings.

Finally, IMGN -- which has nearly tripled in value this year at $17.90, and recently touched an annual high -- is fresh off an eight-day streak on the overbought list. At last check, though, the stock's RSI has slipped below 70, at 67.

Option traders and short sellers alike are rolling the dice on a pullback. ImmunoGen, Inc.'s 10-day ISE/CBOE/PHLX put/call volume ratio of 0.47 sits just 9 percentage points from an annual peak. Plus, 13.7% of the stock's float is sold short, representing eight sessions' worth of trading, at typical daily volumes. IMGN will report earnings one week from today.