Drug Stock Puts Trendline Support to the Test

Coronavirus headwinds have biotechs going volatile

Bernie Schaeffer
Mar 10, 2020 at 2:25 PM
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With the major U.S. indexes suffering their worst week since the financial crisis of 2008 in late February, it should be non-trivial to say coronavirus – or COVID-19 – has become a massive caveat to not only public health crisis, but to Wall Street as well. The spread and severity of the flu-like epidemic is concurrent to the volatile run in markets during the past two weeks. In the past week alone, stocks have raced from their best day in over a decade to a nearly 1,000-point drop into correction territory on Thursday, March 5, outlining the underlying uncertainty that traders can’t seem to shake what the future of the virus means for the economy. Two sectors seeing a benefit from the worldwide epidemic have been healthcare and biotechnology, consisting of drug companies who are fighting to successfully create the first COVID-19 vaccine.

One of the first biotechs to jump into the challenge was Gilead Sciences, Inc. (NASDAQ:GILD). An official at the National Institute of Health (NIH) suggested they should be able to indicate within a few months whether or not the company’s COVID-19 vaccine works. For a more literate view of the crisis, the March 4 situation report from the World Health Organization (WHO) suggested just under 94,000 cases have been confirmed globally. Gilead has also been in headlines this past week for its $4.9 billion acquisition of drugmaker Forty Seven (FTSV), which was announced Tuesday, March 3.

In 2020 alone the biotech has amassed a 19% gain, with long-term technical indicators taking an even more notable stance. For instance, between 2017 and 2020 the shares formed a basing pattern that captured several pullbacks and selloffs. In more recent months, the outperformer broke out of a descending bear triangle pattern, which has in turn been supported by an assortment of trendlines. The shares are now in the early stages of bouncing from this multi-year base, which could indicate that a solid long-term upswing is in play.

As mentioned above, there have been a cluster of trendlines that have emerged as support following the drugmaker’s expansive breakout. In fact, many of these were previous overhead resistance, only enhancing the quality of their recent backing toward the stock. One of the more drastic shifts in support comes from the 320-day moving average, a trendline that GILD rarely surpassed over the past year. Also joining the 320-day as support is the 40-, 80-, 160-, and 200-day moving averages, solidifying a backbone for Gilead stock’s next leg higher.

Now we must admit to ourselves these types of notable gains we are building a foundation for may not be the case for healthcare and biotech stocks. Should the market begin to improve following a decrease in economic worry surrounding the fatal coronavirus. While its unlikely such a sudden lull will come into play for markets, GILD could expand on its recent gains regardless. There is a ripe amount of opportunity for upgrades, with nearly half of the 21 covering firms sporting a tepid “hold” recommendation on the security. Short interest has also shot 21% higher during the past two reporting periods, leaving about two days’ worth of pent-up buying power for short sellers to buy back their bearish bets.

Small cotw chart march 8

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, March 8.


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