Pharmaceutical concern The Medicines Company (
) has made headlines in recent weeks, as the company battles to
extend a patent on its anti-clotting drug Angiomax. On Sept. 10,
the company announced that a U.S. district court had denied APP
Pharmaceuticals' appeal against the patent extension. The news sent
the shares soaring more than 19% as a result, with MDCO settling
into a trading range between the $14 and $15 levels.
As you can see from the chart below, the stock's price action
has created a flag formation. This technical pattern typically
results in a continuation of the stock's former uptrend, and is
characterized by a sharp rally -- a flag "pole" -- and a period of
consolidation -- the "flag" itself. In this case, the continuation
of MDCO's former rally would result in a breakout above the $15
level, sending the shares sharply higher as a result.
In the event that this flag formation resolves itself to the
upside, an unwinding of the wealth of negativity levied against the
shares could intensify MDCO's resulting rally. For instance,
options traders have rarely been more bearishly aligned on the
stock, with its Schaeffer's put/call open interest ratio (SOIR) of
1.21 arriving just one percentage point shy of an annual peak. An
unwinding of these negative positions could create a tailwind for
Meanwhile, data from the International Securities Exchange (ISE)
and Chicago Board Options Exchange (
) point toward a rising preference for call buying. During the
prior two weeks, some 33 calls have been bought to open for every
one put purchased on MDCO. However, whether this call buying is
bullish speculation or hedging activity remains to be seen.
Speaking of which, short sellers have reason to be considerably
nervous about a sharp rally. During the past month, these bearish
traders have loaded up on MDCO shares, increasing short interest by
nearly 7%. As a result, roughly 9% of the stock's float is now sold
short. If the flag formation does resolve to the upside, these
short sellers could be forced into a short-squeeze situation.
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