Biotech funds have stalled at key retracement levels after strong first quarter bounces and could sell off in the coming weeks, but small biotech stocks are still glued to the top of market performance lists, hitting new highs while posting outsized returns. This is typical behavior for the speculative sector, in which big caps move on earnings and outlooks while small caps move on research and financing deals.
It's wise to keep one eye on the research calendar when trading small biotech stocks with compounds in the pipeline, hitting the sidelines ahead of key dates because these issues can drop 50% or more overnight after adverse results. Of course, holding on at all costs can pay off handsomely over time, but the majority will never release commercially profitable products, making early speculation the best way to play the game.
New York-based Axsome Therapeutics, Inc. (AXSM) researches and develops compounds and therapies for Alzheimer's disease and other central nervous system disorders. The stock opened on the national exchanges at $9.00 in November 2015 and topped out at $15.74 two months later, entering a steep decline that posted an all-time low at $1.94 in December 2018. It gapped up just six sessions later, tripling in price overnight in reaction to positive results in a Phase 2 trial.
Buying pressure fizzled out at $10.80 in early February, giving way to a shallow pullback that found support at the 50-day exponential moving average (EMA) one month later. It gained ground at a healthy pace through most of March but stalled at the 2016 high this week, initiating a key test at resistance. The on-balance volume (OBV) accumulation-distribution indicator has surged to an all-time high, fueled by January's secondary offering of 3 million shares, predicting that the price will soon follow.
Invitae Corporation (NVTA), based in San Francisco, compiles and analyzes genetic information used to diagnose and treat a broad variety of disorders. The stock came public at $17.50 in February 2015 and topped out at $22.35 a few days later, entering a steep downtrend that hit an all-time low at $4.35 in April 2018. The subsequent uptick stalled at the IPO opening print in September, yielding a pullback that carved a higher low at year end.
The stock broke out above September resistance in February and reversed on March 21 after lifting three points above the 2015 peak. It has been testing that barrier for the past week, ending Wednesday's session just two cents from the magic number. The current decline could tag the 50-day EMA at $19.50 before attracting the buying interest needed for a breakout, so that's a good level to watch in the coming sessions.
Veracyte, Inc. (VCYT), also based in the Bay Area, offers a variety of genomic diagnostic products and is currently benefiting from a collaborative agreement with Dow component Johnson & Johnson (JNJ). Veracyte came public at $13.00 in October 2013 and entered an immediate uptrend that topped out at $19.00 in 2014. The subsequent downturn continued into March 2016's all-time low at $4.21, ahead of a recovery wave that stalled just below $10.00 in 2017.
The stock broke out above 2017 resistance in July 2018 and has posted a series of new highs through March. More importantly, it reached 2014 resistance in February and broke out three weeks later, so it's now trading at an all-time high, with no overhead supply. OBV has lifted to an all-time high as well, setting the stage for continued upside in the coming months. Pullbacks should hold the 50-day EMA during this period, so a trailing stop below that level makes perfect sense.
The Bottom Line
These small-cap biotech stocks are trading in the 99th percentile in market performance, exhibiting leadership that predicts even higher prices in the coming months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.