Shares of biopharmaceutical company Regeneron Pharmaceuticals Inc (NASDAQ:REGN) extended their gains in Wednesday’s trading session, closing at their third all-time high in as many days. REGN stock accelerated its upside swing and thus steepened its slope again after its May 7 earnings report, and as a result, it now sits in overbought territory — territory that has historically offered a weak risk-reward prospect on the long side.
That doesn’t mean you shouldn’t go long. It just means that right now, REGN stock is better bought on dips rather than chased higher on spurts of momentum.
In its latest earnings report, Regeneron registered analyst beats on both the top and bottom lines. Earnings came in at $2.88 per share to beat $2.68 estimates, and revenues of $870 million came in far higher than the consensus mark for $825 million.
Many analysts and investors still see Regeneron as a strong growth story, and Credit Suisse just raised its price target on REGN stock from $400 to $550.
Bigger-picture, pharmaceutical stocks have been the leading group of the market for five consecutive years — a historical feat that must be respected, but one that (statistically speaking) seems very unlikely to last much longer. Trend-followers riding this space over recent years had one of the best opportunities with large biotechnology stocks to buy on nearly every pullback.
And that brings us to the charts.
REGN Stock Charts
Looking at Regeneron on the multiyear weekly chart, we see that since 2011, REGN stock has rallied roughly 950%, and much of that has come in a bigger-picture channel in which each dip to the bottom was a golden buying opportunity.
In June 2014, after a 25% haircut, Regeneron shares once again arrived at the bottom of this channel, then began their steepest rally yet. As a result, REGN stock was pushed out of the channel to the upside in what appears to be an unsustainable move. (That is, if you respect the forces of gravity.)
Also as a result, Regeneron’s Bollinger Bands (blue lines) have also widened out to levels not seen since 2013 and increasingly beg for a mean-reversion move lower.
Zooming in on the daily chart of REGN stock, we see that even just going back to early 2014, the stock has a strong tendency to stage sharp rallies that are followed by sharp corrective/mean-reversion moves lower. In other words, for as great a strategy as buying Regeneron on the dips has been, chasing Regeneron higher on a high-momentum rally has been an equally awful tactic.
A simple but effective measure of overbought readings over the past couple of years has been how far REGN stock was extended above its 200-day simple moving average (red line). Currently the stock is trading about 27% above this moving average, which is right in line with where Regeneron began short but steep pullbacks in the past.
Aggressive traders could now consider selling short REGN stock on the next bearish reversal for a move back toward the $450 area, while dip buyers will again find better odds of purchasing the stock near those levels and following a bullish reversal.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
