Stocks in the U.S. continued to slide lower on Monday as Wall Street grew more concerned over the economic stimulus plan and the possible government idea to give further aid to the nation’s distressed banks.

The Dow Jones Industrial Average lost 64.11 points, or 0.80%, to 7,936.75 and the S&P 500 fell 0.45 points, or 0.05%, to 825.43. The Nasdaq bucked the down trend and finished up 18.01 points, or 1.22%, to 1,494.43.

Despite the continued weakness in the markets, excluding the Nasdaq, one major bright spot hit the tape in after-hours trading. Shares of biotech company Genentech (DNA) traded up 1% after the company said that a late-stage study combining Avastin with Tarceva to treat lung cancer met its primary goal of extending patients’ lives while preventing the disease from getting worse. The news also took up shares of OSI Pharmaceuticals (OSIP), which markets Tarceva with Genentech. In late trading, OSI soared 11% to $40.60.

Investors can look at this positive news in many ways. One way to view it is that the biotechnology stocks will now "catch a bid" and the sector will see capital pour in as market players look to position for the next big winner. From a technical perspective the biotech space could now start to gain some relative strength. Relative strength is a measure of price trend that indicates how a stock or sector is performing relative to other stocks or sectors.

When good news starts to hit a sector it can often be an early sign that relative strength is coming as investors anticipate more good news down the road. Once investors jump in, the sector with relative strength can gain momentum and advance higher as market bears are forced to cover any short positions.

Now, let's take a look at the charts of four biotech stocks that could be setting up to make a significant move higher, if relative strength shows up for the sector.

1. Synta Pharmaceuticals

The first compelling chart comes from Synta Pharmaceuticals (SNTA). Synta is a biopharmaceutical company focused on discovering, developing and commercializing small molecule drugs to extend and enhance the lives of patients with severe medical conditions, including cancer and chronic inflammatory diseases. Looking at the chart below, you can see that shares of SNTA are coming up on some previous resistance at around $10.30 a share, after the stock ran up big from $4.29 a share in December to current levels of around $9 a share.

If this stock can break above $10.30 a share, the next resistance might be at $11.25 (from back in October 2007; not shown on the chart below), and a break of that level would put shares into all-time high territory.

In just the last two days volume has come in above 200,000 shares, versus the three-month average daily volume of 117,000. It’s worth noting that Synta is seeing some unusual options activity that could be forecasting more gains ahead.



2. Human Genome Sciences

Another very interesting chart is Human Genome Sciences (HGSI). Human Genome Sciences is a commercially focused biopharmaceutical company. The company has three products in late-stage clinical development: Albuferon for chronic hepatitis C, LymphoStat-B for systemic lupus erythematosus and ABthraxtm for inhalation anthrax. On Monday, the company announced it has started shipping its new anthrax drug to the U.S. government and shares shot up over 30% on the news.

Looking at the chart below, you can see that HGSI is coming up on some previous resistance at around $2.60 a share. If the stock can trade through that level it could be set to make another big run higher. It’s also worth noting that over 9% of the float is sold short as of January. This high short-interest combined with the small float of 124 million shares could help fuel a short-covering rally. Notice how volume in January has seen some large spikes like 11 million shares on Feb. 2 and 7 million shares on Jan. 16, versus the 3-month average daily volume of 2.2 million.



3. Nabi Biopharmaceuticals

Next up is Nabi Biopharmaceuticals (NABI). Nabi Biopharmaceuticals is a biopharmaceutical company focused on the development of products in the areas of nicotine addiction and infectious disease. Looking at the chart below, you can see that shares of NABI have cracked through previous resistance at around $4 a share, and the stock has traded through the 200-day moving average of $4.23. This stock could now be setting up for a significant run higher to $5.75 or more.

It’s worth noting that the short-interest sits at 6%, and the company has a float of only 49 million shares – a short squeeze candidate. Also, well known hedge fund Third Point run by activist investor Daniel Loeb holds a large stake over 13% in the stock.



4. ImmunoGen

One more chart in the biotech complex that investors should put on their radar is ImmunoGen (IMGN). ImmunoGen is focused on the development of antibody-based anticancer therapeutics. The company’s Tumor-Activated Prodrug (TAP) technology uses antibodies to deliver a potent cytotoxic agent specifically to cancer cells. Looking at the chart bloew, you can see that shares of IMGN are coming up on previous resistance at around $4.80 a share.

Notice the bullish chart pattern that started back in October where the stock bottomed and started making higher lows as it ascended from $2.47 a share to over $4.50 a share. The stock is now rallying after finding support at the 50-day and 200-day moving averages. If the stock can break through $4.80 a share, it could make a run at $5.50 a share and $6.20 a share. This stock could have some significant upside if it can continue to take out higher resistance levels. Keep in mind that a catalyst for this stock could be its promising second-generation version of the blockbuster breast cancer drug Herceptin.



To learn about a few more biotech charts that look compelling right now, visit the Charts of the Week portfolio.

Also, if you want to improve your own technical stock-picking skills, you can share ideas and pick up some tips on Stockpickr’s technical-analysis forum.

Posted on Feb. 3, 2009

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