Support and resistance lines are the building blocks of technical trading, essential in identifying entry and exit points by showing when buyers or sellers are taking over.
Just because a stock hits a support area doesn’t mean buyers will step in. Similarly stocks break through resistance sometimes, rather than always pulling back from it, but knowing support and resistance will help you determine what kind of moves are likely.
With biotech and pharmaceutical stocks, you can combine technicals with catalyst events, increasing the probability of a positive outcome.
Here’s an example of support and resistance, combined with a catalyst event in the daily chart of Lexicon Pharmaceuticals Inc. (LXRX):
In the annotated chart above, notice where the support and resistance lines are. In this case, LXRX was expected to report data from its third trial of Sotagliflozin. Prior to this, the company already met both of its primary and secondary endpoints for the treatment, and consequently, it may have been a high probability trade at the time. That in mind, you might have considered purchasing the stock around the support area at $13.70.
Here’s how the trade would have turned out.
LXRX rebounded right off of the support area and broke above one of its previous resistance levels. You could have used the resistance area as a target exit; while the stock broke through resistance, you would have locked in profits and not run the risk of the stock pulling back.
The bottom line
Support and resistance are simple, useful trading concepts. Practice looking at charts to get an idea of the how they work, and see how stocks with catalyst events have bounced off of support and resistance during past data releases and pipeline updates and the chart may help you identify potential entry and exit areas for your trade.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.