The backdrop: Generic drug manufacturer Teva is down more than 40 percent in the last three trading days, from $31.25 at Thursday’s open to $18.59 at Monday’s close. The company reported half a dozen negative catalysts in its Thursday earnings report: badly missed second-quarter numbers, a big dividend cut, and lack of a permanent CEO are just three.

It’s now in a position where it is worth considering as a day trade, but not worth investing in as a long-term turnaround play.

The set-up as a day trade: When a stock like this gets overdone on the downside, a lot of the shorts find themselves with huge profits. They all cover and you get a nice one- or two-day rebound. If a green candle on the daily chart starts forming within first 30 minutes of market open, that’s an indication that it’s headed for an extended run, which will make it a good day trade today.

On Monday, I shorted TEVA in six different trades (trading 30,000 shares in all) and made $345.

The breakdown as a long-term hold: TEVA will keep falling until the fundamentals change. The lack of management and inability to find a new CEO creates uncertainty; so do the many potential changes in the healthcare markets, what reimbursements will look like, what the new health care plan will look like, how generic drugs are going to be priced in the future, whether the FDA is allowed to relax its approval guidelines. Traders and investors hate uncertainty.

What must change for TEVA to be a long-term buy again: The dividend cut hurt the stock because it means that a lot of mutual funds had to sell Teva because it no longer fit the parameters of the fund. Longer term, it was the right call; it reminds me of Kinder Morgan Inc. (KMI), which did the same thing last year, and repositioned itself well for the future.

Teva needs stable management, clarity on the political and regulatory side, and a gameplan that allows the stock to consolidate and establish a new base. Until that happens, it’s nothing more than a day 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. At the time this commentary was published on RagingBull.com, he had no shares, options or open orders in TEVA, though he could trade it today based on how the stock opens; he last traded TEVA on Monday (Aug. 7) as described above.

Be a Better Stock Trader, Starting Today

Get the expert insights, tips and strategies you need to optimize your trading skills and profiles
START NOW