What a way to start 2014! Gloom and doom have struck the stock market with a roughly 1,000-point decline in the Dow Jones Industrial Average.
#-ad_banner-#The Federal Reserve's dialing back of its massive bond buying program, emerging-market weakness and several economic indicators turning downward are some of the culprits of the heavy selling in the first month of the year.
While many supposed stock market experts and perma-bears are claiming that the selling is signaling much more downside to come, I wholeheartedly disagree. This selling is nothing more than simple profit-taking after the incredible bull market of 2013.
One very practical reason is that investors wanted to delay paying taxes on their capital gains. This caused many to wait until 2014 to take profits.
Another obvious reason is the fact that markets never travel in a straight line for long. There is always selling after a move higher, and this time that selling took longer, so it was more severe.
I am confident in the stock market and think this pullback is a great time to find bargains.
While many stocks sold off during January, a few bucked the downward trend. In fact, I located a stock that gained 8% in the first month of the year. Even more impressively, it soared over 350% between its Oct. 31 low and its late January high.
After a series of gap downs caused by negative news in October, shares plunged to the $2 area in November before steadily climbing higher to almost $10 in January. Shares have since pulled back to the $7 range where they appear to be forming a base that will make a great entry level.
The stock I am referencing is Ariad Pharmaceuticals (Nasdaq: ARIA). The company focuses on finding treatments for various forms of cancer.
It was all systems go for this successful company last fall as its share price hit $23 in September. Soon after this high, the FDA quashed the bullish fever by placing a partial hold on new patient enrollment for clinical trials of Iclusig. This drug targets abnormal tyrosine kinase in certain leukemias.
Since that time, the FDA decided to allow ARIA to resume marketing and commercial distribution of the drug due to a revision in U.S. prescribing information. In addition, the European Medicines Agency provided a positive opinion regarding keeping Iclusig on the market in the European Union. Not to mention, the company recently signed an agreement for distribution of Iclusig in Australia.
Finally, activist health care hedge fund Sarissa Capital Management has upped its holdings in ARIA to 11.5 million shares. This represents just over 6% of the outstanding shares. Sarissa is managed by Alex Denner, a Carl Icahn protegee.
Combine these factors with rumors of a potential takeover by a major pharmaceutical company, and it equals continued bullishness.
Taking a look at the technical picture, shares have dropped from the recent highs near $10 to the $7 range on profit-taking.
The Japanese candlestick chart printed a doji formation on Feb. 4. In candlestick charting, a doji represents indecision and often precedes a change of trend.
The technical picture combined with the fundamental happenings creates a very compelling bullish case right now.
Action to Take -->
-- Buy ARIA between $7 and $7.50
-- Set stop-loss at $5.87
-- Set initial price target at $13 for a potential 73% to 86% gain in 90 days
This article originally appeared on ProfitableTrading.com:
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