Shares of Nektar Therapeutics (NKTR), a U.S.-based pharmaceutical company, are stuck in a classic wedge chart pattern. This chart pattern is pointing to a major 45% swing in the stock any day now.

Since it is a pharmaceutical stock, a 45% short-term swing isn't a wild expectation. The company is used to seeing sharp swings on drug announcements and other developments. But finding a technical pattern like this in a stock's chart gives us an idea of which way the next major swing will go.

A wedge pattern has two key levels – resistance and support – converging to an eventual breakout. When looking at Nektar's wedge pattern, the key resistance level is in red, and a green support level helps keep the stock within the formation.

Chart showing the formation of a wedge pattern for shares of
Optuma

From here, we know to watch those two levels. Once the stock breaks either one of those levels, we know it is off to the races in that direction from there. But waiting until then may also be too late. It pays to know in advance which way the breakout will likely occur.

And for that, we can look at the characteristics of a wedge chart pattern. One tendency of wedge patterns is that they are continuation patterns. This means that whatever direction the stock was heading in before the pattern formed is typically the direction the stock continues in.

In this case, the stock was clearly declining prior to this chart pattern being formed. Nektar's 52-week high price is nearly $70 per share – more than double the current price. That tells us to expect the breakout to be to the downside with a price target of $15.50 per share – a 45% price drop from the current level. In the event that the stock breaks out to the upside, it will see a similar sharp swing, but in the opposite direction. 

Chart showing the upside and downside potential for Nektar Therapeutics (NKTR)
Optuma

Thanks to the wedge chart pattern, we know that the stock should jump that much in quick fashion. The price target of any wedge formation is the height of the pattern itself. This wedge formation had a maximum height of $16.50 per share. Then we can simply add or subtract that from the key levels to get the price target.

The Bottom Line

Nektar Therapeutics stock appears set to make a major move. The wedge formation is great because it not only gives us a price target once a breakout occurs, but in this case, we also know that the breakout should be to the downside. From the current price, Nektar stock stands to drop, or pop, by about 45%. Just pay attention to those key levels.