Well-known large-cap biotech stocks showed disappointing or downright awful performance throughout 2018. And 2019 hasn't been a whole lot better, especially for many of the industry group's biggest names.
Just witness the damage that companies such as Biogen and Regeneron Pharmaceuticals over the prior two calendar years. Gilead Sciences is getting some of its mojo back as the world eagerly seeks new vaccines and treatments to fight coronavirus. But the former huge stock market winner has endured a slow burn ever since it topped near 123 all the way back in 2015.
But on Wall Street, money flows from one sector to another. Paupers often become princes again. When this happens, look for the double bottom to show up.
Blood disease expert Bioverativ, a Biogen spinoff, created this key base. Learn its principles to improve your chances of landing a great stock market winner.
Bioverativ had a nice rally going before it soared 62% on Jan. 22, 2018. Make sure you see the big price gap in the accompanying chart below. The stock soared in mammoth volume on news that it's being acquired by French pharmaceuticals titan Sanofi for $11.6 billion.
Could an investor have used good stock charts to find a breakout by Bioverativ before that giant single-day gain? Yes. Bioverativ crafted an 11-week double-bottom base, helping to set up the big move.
Find The Double Bottom, Gain An Edge
If you don't use stock charts, you're trading at a disadvantage. Without charts, it's very tough to determine two keys about the market: 1) the current psychology of buyers and sellers; and 2) the balance of supply vs. demand in any given stock.
Bioverativ broke out on Jan. 9, when the stock market was in a confirmed uptrend. That's the best time to buy top-performing growth stocks. You have greater odds of making money when you invest with the larger trend.
The specialist in therapies for hemophilia established an excellent prior uptrend, running from 44.98 on the close of its Feb. 2, 2017, market debut to a peak of 64.41 more than five months later. The stock corrected 16% in four weeks. It carved out a three-month saucer with handle (1), but never broke out.
Then Bioverativ really began to sell off.
The First Low
On Oct. 27, the midcap swooned 12% and hit as low as 50.50 (2). This created the base's first low. In a proper double bottom, a stock will rebound back near its highs, then sell off a second time and undercut the first low. Why? You want to see an authentic shakeout of uncommitted shareholders. Find signs that shares move from weak hands to strong hands.
The correct buy point? When the stock rises a dime over the middle peak between the two lows. Bioverativ did exactly that. The stock rebounded up to 58.19, less than 3 points off the base's left-side peak of 60.74, then nose-dived again. This time, the sell-off took Bioverativ all the way to 48.28. A fine undercut of the first low (3).
A double bottom forms over a minimum seven weeks. Corrections of more than, say, 30% to 33% are not ideal. The deeper the correction, the more a stock has to work just to get back to its highs. Also look for signs of symmetry within the base.
An 11-Week Beauty
On Jan. 9, 2018, Bioverativ gapped up 7%, surpassing the 58.29 buy point (middle peak of 58.19 plus 10 cents). Volume gushed 75% above normal levels. Seven sessions later, it traded at 64.11, extended and 10% past the proper entry, right before merger news sent shares vaulting.
Prior to its breakout, the Waltham, Mass., firm notched gains of 64%, 73% and 31% in earnings per share. Revenue had soared 317% in 2015, then rose another 58% and 32% the next two years.
Expect double bottoms to proliferate among leading stocks when the major indexes fall furiously in several waves. Great market leaders built double bottoms and broke out after the bear markets in the fall of 1998, the fall of 2002, and other occasions.
Sometimes you'll see a handle form on the double bottom. It can present an additional buy point.
In The Stock Market Today
IBD Live has been noting good action in DocuSign, one of the leaders in the enterprise software space, and a new member of the watchlist on IBD Leaderboard.
After peaking at 92.55 on Feb. 19, the e-signature success story dived to a near-term low of 64.88, equal to a nearly 30% decline from the high.
Notice on a daily chart how the sell-off in early to mid-March undercut a Feb. 27 initial low of 76.18.
Five weeks into the base-building effort, DocuSign has rallied back near the interim peak of 90.73 in between the two lows.
Keep in mind that in general, good double-bottom bases form over a minimum of seven weeks' time.
A version of this column was first published on March 1, 2018. Please follow Chung on Twitter at both @SaitoChung and @IBD_DChung for more analysis on financial markets, growth companies, charts and stock breakouts.
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