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Trader toolkit: Using up channels to trade biotech stocks

Kyle DennisKyle Dennis ·

When it comes to technical analysis, I believe that simple tends to be better. That’s why I typically use channel support and resistance lines, as well as catalyst events, as an indication for potential entry and exit points on biotech stocks.

Not every setup works, of course; you will find stocks that show a bullish pattern, for example, that don’t follow through. But these situations pan out often enough that it’s worth knowing what you are looking for to spot and use up channels to your advantage.

Check out this daily chart on Cara Therapeutics (CARA). Even without the notations, it’s easy to see that a channel is forming, but the lower uptrend line clearly shows support with the top line being resistance. Notice how the stock bounces off of the support line and trades higher. The opposite is true with the resistance line.

Now, let’s assume you bought at the lower uptrend line, in anticipation of Cara announcing a positive catalyst. Here’s how the trade would have turned out.

The meteoric rise here was due to a positive catalyst — Cara Therapeutics reported that it would be continuing its Phase III trial of I.V. CR845 for postoperative pain — but the uptrend certainly helped.

That said, you might wonder where you should take profits in these cases. If you’re more risk tolerant, you could hold the stock until it reaches the upper trend line; if you’re risk-averse, you might take profits quickly.

Final thoughts

Using uptrends, or up channels, coupled with catalyst events can be a profitable strategy. Look for stocks exhibiting uptrends with upcoming catalyst events, and then build stories around those stocks. After consistently practicing, you should get the hang of identifying and using this pattern.

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  Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  

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