Over the last few months, the pharmaceutical sector has been
among the worst performing sectors. From March 4 through April
11, the Market Vectors Pharmaceutical
) dropped 7.3% compared to a 3.1% decline for the S&P 500.
The recent selloff has brought a number of pharmaceutical stocks
down to oversold levels on their weekly charts. One such stock is
Vertex Pharmaceutical (Nasdaq: VRTX).
VRTX came to my attention when I ran a scan for stocks whose
weekly slow stochastic readings had performed a bullish crossover
last week. When I first looked at the daily chart, I wasn't that
excited about the stock. We see the big decline from $86 a share
in February down to a recent low just below $60. The one thing
that was encouraging on the daily chart was that the recent low
wasn't as low as the low back in November.
When I looked at the weekly chart for Vertex Pharmaceuticals
stock, I got significantly more excited about the company. Seeing
that the stochastic crossover is what brought the stock to my
attention, that is one of the first things I looked at. It also
caught my attention by virtue of the series of higher lows the
stock has been able to put in over the last three and half
After looking at the chart for a while, I looked at previous
instances when the stochastic readings crossed over in a bullish
manner after being in oversold territory. In each instance, at
least for the last three plus years, the stock has rallied
sharply in the ensuing months. I took the liberty of circling the
three prior instances and the occurrence from last week.
Something like a
of the stochastic readings might seem too simple to be effective,
but if it has worked in the past, who am I to question it? After
all, technical analysis in its simplest form is nothing more than
VRTX is scheduled to release earnings results this coming
Thursday and analysts expect the company to lose $0.68 per share.
As a relatively new pharmaceutical company (founded in 1989),
seeing a company lose money isn't unusual as the spending on
research and development tends to be high. And whether the
company beats estimates or not is irrelevant, the important thing
is how investors react to the report.
Looking at the sentiment indicators, the short-interest ratio
currently stands at 4.2 while the
is among the highest 88% of readings for the past year. There are
25 analysts following the stock with 17 rating it as a "buy" and
eight rating it as a "hold". When you add these three indicators
up, you get a sentiment composite reading of 11.8 on my rating
system, which is a bullish reading from a
The stock hasn't moved too much on its earnings reports over
the past year, so I think it would be save to wait until after
the earnings announcement to go long VRTX. Even if it moves a
little higher, you are taking some of the risk out of the trade
by waiting until after the earnings report.
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