Battleground stock Arena Pharmaceuticals (ARNA) appears to have been slightly shaken when CNBC’s Jim Cramer advised viewers to sell the stock yesterday. The heavily traded stock has been declining off of a peak reached in mid-January off of bullish expectations for its obesity drug Belviq (lorcaserin).
However, since coming off a peak at over $7.70 a share, the stock has entered a period of consolidation that would appear to be setting up a major breakout. However, the direction of that breakout and its timing remain staunchly unclear.
Technical Signs Point to a Big Move Coming Soon
Arena Has been a volatile stock, hitting a 52-week low of $4.05 a share on November 7 less than six months after reaching its 52-week high of $9.25 on May 28, a 56.2 percent decline, after safety concerns were raised about another Arena pipeline drug in late August. Then, the stock bounced over 90 percent to reach its mid-January peak, including an over-30 percent rise in just the first half of January.
However, all the technical signs appear to currently be pointing towards the stock consolidating in preparation for a big move either up or down.
The chart pattern is a clear symmetrical triangle, with a resistance line sloping sharply down from its January 16 peak and a support line sloping sharply up from its November 7 low. This typically means that both bearish and bullish pressure is building up and the stock is likely going to make a big move in the near future to release the pressure, possibly sparked by a news item working as a catalyst.
However, there’s several other interesting factors that appear to be developing as well.
The 9-day, 20-day, 50-day, and 200-day moving average have all begun to converge, falling between $6.19 (the 200-day) and $6.56 (the 50-day). Add to this a 14-day RSI that is approaching dead center at just over 45 and a 14-day stochastic RSI at just above 0.50 and you have the picture of a stock that traders appear to be unsure what to do with.
This perception is only bolstered when looking at the MACD line in relation to the signal line. The two indicators have stayed very close to each other for the entire month of April. The MACD crossed the signal from below, traditionally considered a buy signal, at the start of the month. Then, it barely stayed above the signal before crossing from above on April 13, a classic sell sign, after which the two lines moved in tandem before the MACD crossed the signal form below again on April 15.
On the whole, technical traders looking for a clear sign which direction the stock will break are likely frustrated by Arena.
Jim Cramer Adds Fuel to Bears' Fire
Wednesday, though, brought at least one industry expert throwing in his two cents. During his “Lightning Round,” Jim Cramer said the following about the stock: "No. That one has already happened. It's time to sell."
The repercussions today didn’t appear to be dramatic as the stock was down just under 1 percent, but Cramer’s bearish advice joins the traders who have driven the short float in Arena up to 24 percent. While that number has declined recently, with a 5.8 percent drop in share’s shorted in the second half of March, the bears may also have gotten more red meat when it was announced that Director Tina Susan sold 35,000 shares in a transaction dated to Monday.
A Battleground Stock that May Soon See Some Resolution
On the whole, it’s decidedly unclear what’s going to happen with Arena Pharmaceuticals as price trends converge and the stock’s consolidation continues.
Cramer’s declaration may give the bears the oomph they need to finally stop testing support and break through in a continuation trend of the sell-off that started in mid-January. However, with a leading obesity drug in a massive market, it also seems possible that Arena might be able to spark a reversal trend and climb to new highs.
Regardless of what happens, the chart pattern would seem to indicate that a big move could be on the horizon in the relatively near future.
Editor's note: This article previously referred to "safety concerns" for Belviq in error. The safety concerns in question regarded experimental lung drug APD811, not Belviq.
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