$SHPG Quiet Signs Of Strength

Biotech Stocks

Shire’s Quiet Signs Of Strength: A Series Of Strong Weekly Closes

There are times when a company is so good or its products are so hot that you almost don’t care what its chart looks like. But industries usually breed more than one good company. For the investor, a great base can be a differentiator. Take the Irish drug giant Shire (SHPG), one in a crowd of strong players in the summer of 2013.

How did Shire’s base shine

When you study a stock’s chart, pay close attention to the size of the decline within the base. Then, see how the stock acts week to week. Do you see many instances in which the stock finishes high in its weekly range? If so, take note of that as strength.

Such action implies that institutional investors have actively come into the stock and given support. Their demand is high.

In mid-2013, Actavis (ACT) was on its way to a 58% annual EPS gain and 47% revenue growth. Biogen’s (BIIB) 2013 EPS and revenue would rise 37% and 26% respectively.

Shire’s numbers were weaker by comparison, ending the year with earnings up 23% and 9% revenue growth. But the company was in flux.

Dr. Flemming Ornskov had stepped in as chief executive at the end of April. Takeover talk was in the air and the drugmaker, already the leader in attention deficit hyperactivity disorder drugs, had a development pipeline chock-full of new possibilities.

By July, analysts were turning positive on the company. At that time, the stock was nearly finished scaling the right side of a four-month consolidation.

In the cup portion of that base, the stock closed at least seven weeks above the midpoint of week’s trading range. This suggested healthy institutional interest. In the handle, the stock closed two weeks very high in the week’s range (1).

Volume tallies indicated an additional sign of strength. Out of the total of 10 high weekly closes, at least five came in above-average trading volume, including the week ended May 10, 2013 (2).

The base’s left side had been tight and orderly. A pullback of not quite 16%, sketched out in tight weekly trading ranges. The stock punched briefly below support at the long-term 40-week moving average (not shown in this chart) in forming a bottom in early May.

Shire rebounded hard from the base’s low, with a surge in huge volume on May 10 that carried the stock well back above its 10-week moving average. This 2.1-million-share upshift required some heavy lifting by large-scale investors.

Shares climbed back over 100 in late May, then formed a perfect handle on the cup; prices drifted lower in generally light trade.

The handle tested support at its 10-week line. The stock then turned and began climbing. It actually topped the 100.83 handle buy point in light trade on July 11, ahead of Shire’s pending Q2 report.

The stock leveled off, running against its 10-day moving average (see a daily chart) just a day before its earnings report. On July 25, shares surged 6% — their best gain in four years — in double normal trade. Second-quarter earnings and revenue topped expectations, and results showed the market widening for the company’s top ADHD drug, Vyvanse. The move launched a 163% rally over the next 14 months.


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