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ARWR Set To Run Away

12/06/13 04:31:14 PM
by Billy Williams

Low-priced stocks are usually best left alone, but ARWR is setting up to run away with the bulls.

Security:   ARWR
Position:   Buy

Every trader dreams of catching a stock after it hits a price low and then watching it take off to earn a 1,000% plus, but buying into a falling stock is like trying to catch a falling knife. Stock prices rise and fall for a number of reasons but buying a falling stock can be dangerous because a stock can keep falling. Even value-oriented investors cringe at the thought of buying a stock they believed was a bargain only to watch its value keep declining. That can be tough for anyone to stomach, which is why most traders like to buy stocks as they trend higher. There is a low-priced stock that is coming off its lows that has the potential to turn into a home run and outperform the rest of the market as 2013 comes to a close.

Arrowhead Research Corporation (ARWR) was founded in 2003 and operates as a clinical stage therapeutics company in the Biotech sector. It has key development programs in oncology, obesity, and chronic hepatitis B virus (HBV) infection.

Figure 1. ARWR formed a tight trading range from February of this year to the summer as volume began to increase. In mid-July, the OBV began to trend higher as volume increased and price moved in step to break through the trading range's upper resistance.
Graphic provided by:
The stock has been a chronic underperformer which is not uncommon as beginning biotech companies struggle to get their research patented and approved through the FDA. That, and the inconsistent sales and cash flow, have kept the stock off the major institutional players' radar and scared smaller retail investors away due to the perceived risk.

But ARWR has some compelling technical traits that are attracting the attention of Wall Street which has ARWR undergoing strong accumulation by investors.

First, going back a bit in time, ARWR's trade volume was stagnant with 50-day daily volume averaging just under 100,000 shares a day causing price action to contract within a tight trading range from February 2013 into the summer. The On Balance Volume (OBV) indicator remained flat but then, as price traded near its price low within the trading range, it began to move higher.

Figure 2. Price broke out and increased more than a 100% in a two month period - a very bullish indicator. The stock is still trading under $10, at around the $9 level, but is poised to break higher as it trades above its 50-day and 200-day SMA.
Graphic provided by:
Most big rallies occur at, or near, a stock's price low which seems to be the case with ARWR. And, now, with the OBV trending higher, price moved in step and began to trade toward price resistance at the top of the trading range.

At the same time, ARWR's 50-day SMA turned a corner and crossed up through its 200-day SMA, a major indicator of a trend reversal and a sign that the bulls were now taking control of the stock's price movement.

Still, despite the positive technical action, stocks below $10 are usually better left alone until they prove themselves by trading higher, preferably within a short amount of time. The good thing, though, is that ARWR has proved itself by gaining more than 100% within a two month time frame.

Now, as price has pulled back only to trade up through the $9 price point on higher volume, it looks like ARWR is set to run away into higher territory.

That said, it's important to let the stock get above $10 and then look for a low-volume pull back and then enter the stock as it trades up through its previous price high.

Use a stop loss of no more than 7% from your entry price and adjust the stop as the stock trades higher. If it declines, get out right away and wait for another entry as long as the stock's volume continues to rise and price action remains bullish.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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