Monday, July 07, 2014

Short Trading Idea: Pharmacyclics Inc. (PCYC) - Late Stage Base Failure

Pharmacyclics (PCYC) has been one of the bull markets biggest winners. Rising over 6,000% after breaking out of a flat base, inside of a cup and handle base, the week of September 11, 2009 above a $2.41 pivot point. At the breakout, the fundamentals were non existent. It was just a story. There was no sales or earnings growth, company was losing money, and estimates showed no signs of strong expectations and more losses.

Today, the fundamentals are fantastic. Sales and earnings are expected to grow 67% and 34% respectively, over the next three years. The problem is, even at lofty valuations, three times growth, the stock is fairly valued at these levels 12 - 18 months out. But a single hiccup, especially after poor recent guidance and estimates for this year and next few quarters extremely poor, could panic institutions into heavy selling.

The stock topped out the week of February 21, 2014 after gapping and breaking out of a late stage, double bottom with a high handle base on a strong earning's report, at just over $154. The relative strength line never confirmed the new high. The breakout failed over the next two weeks, eventually falling 46.7% and slicing through the fifty and two hundred day moving averages in heavier volume.

The stock has spent the last three month trying to breakout above the fifty day moving with little success while the market has rallied, and is currently in the process of stalling at the fifty day moving average for the third time. A breakdown below the fifty day moving average, in heavier volume, could cut the stock in half down into the $50 - 60 range. This would be within range of how far, on average, big winners fall after topping. Protective stops should be placed above $105 or the recent high just before the stock breaks down.

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Full Disclosure: No Current Position

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