Ariad Pharmaceuticals (ARIA) Plummets on Signs it’s Overbought

The buyout rumor giveth, the buyout rumor taketh away.

Shares in Ariad Pharmaceuticals (ARIA) dropped again on Monday, giving up much of the 11 percent gain from Friday. Ariad actually gapped up almost five percent to start the day before starting to plunge about 15 minutes after the markets opened, ultimately shifting to a loss of about 9 percent by early afternoon.

Rumored Buyout May Not Materialize

Potentially driving the loss was an article by TheStreet’s Adam Feuerstein that cited an anonymous institutional investor who was shorting the stock as saying that Friday’s buyout rumors were unfounded. "A takeover of Ariad by any Big Pharma would be career suicide for the business development guy proposing such a deal," this investor told Feuerstein. The investor also cited the potential for competition from Novartis’ (NVS) myeloid leukemia treatment that fills a similar role to Ariad’s Iclusig.

Technical Signs Indicate ARIA Overbought

However, the more-likely source of the plunge can be found in technical factors that would seem to indicate the stock was overbought. Since its dramatic October plunge after the FDA pulled Iclusig on blood clotting concerns, and several months of back-and-forth swings on very heavy volume, Ariad has been staging a strong rally that has placed it among the best performers in its industry of the last two months.

Ariad’s heavy daily volume would indicate that this small-cap company has become something of a battleground stock, and clearly one most traders are watching. And, as such, the more likely explanation for today’s sell-off can be seen in the stock’s relative strength index (RSI) crossing 70 this morning, a technical sign that traditionally indicates a stock is overbought.

The stock also flirted with an RSI of 70 twice in late December and earlier this month, with a sell-off following soon after on both occasions. Volume today was once again very high, clearing 70 million shares by 2:30pm. With a short float of close to 25 percent, it’s clear that Ariad remains a focal point for bullish and bearish traders alike.