Stock Quotes in this Article: CYTR

DELAFIELD, Wis. (Stockpickr) -- The recent selloff in the biotechnology complex is creating golden opportunities throughout the sector for potential rebound plays.

Some of these plays have massive upside potential, with huge short interest and beaten-down charts. The sentiment on some of these stocks is extremely negative. Many of these biotech stocks also have upcoming catalyst events that could be a major driver for higher share prices. From my viewpoint, now is the time to start digging into these beaten-down names -- especially in the small-cap segment of the biotechnology world.

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One speculative biotechnology stock that's catching my eye here is CytRx (CYTR), which operates as a biopharmaceutical research and development company specializing in oncology. This company's oncology pipeline is focused on the clinical development of aldoxorubicin (formerly known as INNO-206), its improved version of the widely used chemotherapeutic agent doxorubicin. CytRx is initiating a phase III pivotal trial under a special protocol assessment with aldoxorubicin as a therapy for patients with soft tissue sarcomas whose tumors have progressed following treatment with chemotherapy.

This stock has taken it on the chin during the recent biotechnology sector correction, with shares plunging lower by 44% so far in 2014. That's one heck of a drop, and unfortunately for CytRx, it's a drop that might have been somewhat self-inflicted.

CytRx is no stranger to controversy; the company has been accused of being a part of a stock promotion scheme by the investor relations firm the Dream Team Group. On March 13, an article published on Seekingalpha.com alleged that a CytRx-paid promoter used multiple aliases on third-party Web sites to tout the stock. As a result, multiple lawsuits have been filed against CytRx, which the company says are without merit.

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The recent negative press on CYTR has weighed down the stock heavily, but the bigger picture for this company is the potential of its under-development cancer drugs, which could be major blockbusters if approved by the FDA. In my opinion, the bearish sentiment around CYTR over the alleged stock promotion scheme does not warrant this stock trading as though it has nothing of significance in its cancer drug pipeline.

This company recently raised $86 million and said during its latest earnings report that it's well-funded to execute on its corporate objectives for the foreseeable future. During 2013, this company reported positive top-line results for aldoxorubicin from its phase IIa clinical trial for STS, and it initiated two phase II clinical trials in glioblastoma and Kaposi's sarcoma. The company's CEO recently said that CytRx is well-positioned to commence its global phase III trial of aldoxorubicin and that it has a number of major milestones on tap for 2014.

How heavily-shorted are shares of CYTR due to all of the recent issues? "Very" would be an understatement. The current short interest as a percentage of the float for CYTR is extremely high at 22%. That means that out of the 43 million shares in the tradable float, over 9.5 million shares are sold short by the bears. There's no denying that the bears have been dead right over the last three months, but shares of CYTR are now trading in oversold territory, and the technical picture for the stock is starting to shape up rapidly.

This stock has been downtrending badly over the last three months, dropping from a January high of $8.35 to a recent low $3.15 a share, with shares consistently making lower highs and lower lows, which is bearish technical price action. As I mentioned, that extreme drop has now pushed shares of CYTR into oversold territory, since the stock currently has a relative strength index reading of below 30. Oversold can always get more oversold, but it's also an area from which a stock can experience a powerful bounce higher. Shares of CYTR have also recently dipped lower into the previous gap-up-day zone from last December that started at $2.19 a share and went to $4 a share.

Traders should now look for long-biased trades in CYTR as long as it's trending above its recent low of $3.15 a share and then once it breaks out above some near-term overhead resistance levels at $3.69 to $4.17 a share with high volume. Look for volume on that breakout that hits near or above its three-month average action of 2.98 million shares. If that breakout gets underway soon, then CYTR will set up for a monster move higher that could easily send this stock towards $5 to $6 a share, or even $6.50 to $7 a share. Basically, if this stock does indeed break out soon, I expect it to bounce big considering how hated and oversold it has become.

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Another key technical development that has me warming up to CYTR here is that its moving average convergence-divergence (MACD) indicator is setting up here for a bullish crossover to trigger. When you combine that with the current oversold condition of CYTR, then we have a powerful long-biased setup that looks to be taking shape. The only thing that would put me on pause for a monster rebound higher for CYTR in the near-term is if the stock broke below support at $3.15 a share with high volume. A break of that level would then have me looking for this same bullish setup to occur after more of that previous gap gets fills.

The bottom line: The alleged stock tout scheme is bad, but it has now created what could be a monster opportunity in shares of CYTR. The potential fallout from the stock-touting scheme has driven CYTR down to very attractive levels, and any positive news on its lead cancer drug will send this stock soaring higher. The shorts were right, but now might be the time for them to cover and lock in their profits and get long CYTR.

-- Written by Roberto Pedone in Delafield, Wis.


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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.