|Figure 1, a daily chart of Biogen Idec, Inc. (a biotechnology company specializing in drugs for neurological disorders, autoimmune disorders, and cancer), is a great example of what often happens on a large gap up. In this case the stock hit its 52-week high of $84.75 in early October after soaring on buyout rumors; note the spinning top candlestick hinting that this was a potential top. The axiom "buy the rumor, sell the news" obviously would have failed in this case.|
|Patient traders often keep their powder dry and wait for gaps to close as a much wiser and safer entry.|
This is the opportunity now for the intrepid short-term trader or the fortunate longer-term trader who may have taken the gift horse at face value, cashed in and wants back on this bucking bronco. The gap is closed, buying on support.
|FIGURE 1: BIOGEN, DAILY. The large/dangerous gap now is closed, affording a safer entry.|
|Graphic provided by: StockCharts.com.|
|Note there was an opportunity for a momentum-type trader who sees a buy. This would have been a safe entry for a possible breakout play. The stock closed on a new high after finding support from the nearby 20-day exponential moving average (EMA). It does not get much safer than that for a potential breakout play; the trick is you have to be watching this stock closely to buy before the closing bell or have a buy-stop order in place. The order is triggered when the market price touches or goes through the buy-stop price. If the price exceeds the price you have set, it will automatically trigger a market order.|
|The indicators below the chart are considered, with the most hopeful being the MACD (moving average convergence/divergence). Here we see a bullish cross of the signal line just beginning and its histogram showing a positive divergence to recent price action.|
The relative strength index (RSI) languishes below its key 50-level warning of overhead resistance. The stochastic oscillator shows an oversold condition and needs to turn up through the 20 level to reflect a potential up-leg beginning.
|An aggressive short-term play is suggested with a target zone between $77.50 and $81. Action at the nearby moving averages need to be monitored, as the next move will likely be a bearish close under the 70-day EMA (negating a buy) or a bullish close above the 20-day EMA, currently 71.70.|
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