Biotech stock’s mixed signals

  • Array (ARRY) hit new high but also made a lower low
  • Stock formed an “outside day” with an up close
  • History suggests relatively low odds of next-day rally

Array Biopharma (ARRY) hit a new record high yesterday of $24.56, another milestone in the cancer-drug specialist’s roughly 800%-plus gain over the past three years, which includes an 80% jump since late December:

Array BioPharma (ARRY), 1/4/16–3/14/19. Array BioPharma (ARRY) price chart. Biotech breakout.

Source: Power E*TRADE

ARRY has hit a few all-time highs this year since it first catapulted above its 2018 peak on February 5. What made this one a little different was how much it initially rallied above and below the previous day’s close.

Zeroing in on the past few days of price action shows that after going up more than 2% intraday, ARRY sold off 5.5% to make a lower low, then rallied close higher on the day (but a little below the open):

Array BioPharma (ARRY), 2/28/19–3/14/19. Array BioPharma (ARRY) price chart. Record high but intraday downturn.

Source: Power E*TRADE

Yesterday was a so-called “outside day,” which is one with both a higher high and a lower low than the previous day—which supposedly reflects indecision on the part of traders, since they’re probing the upside and the downside on the same day.

A traditional interpretation of this type of outside day may also hold that, because the stock closed higher, traders ultimately came down on the bullish side of the ledger—and that, understandably, could lead some observers to believe traders were ready to extend an already uber-hot run.

That’s the “logic.” Here’s what ARRY has actually done after 29 previous up-closing outside days that were also two-week (or longer) new highs:

One day after (today): closed down 59% of the time, average loss of -0.6%.

Two days after: closed down 62% of the time, average loss of -0.4%.

Three days after: closed up 52% of the time, average loss of -0.03%.

In other words, the expectation of immediate upside follow-through after seemingly “bullish” outside days like yesterday aren’t supported by the facts. More often than not, ARRY closed lower the next couple of days.

Analyzing yesterday from a slightly different perspective—as a day that makes a two-month (or longer) new high but also makes a lower low and closes up—again showed ARRY tended to decline the next day (59% of the time, average loss of -0.1%), and also showed the stock was more likely to close lower the next two days (76% and 69% of the time, respectively).

Either way, traders who think ARRY could be poised to add to its rally are less likely to see that bullish action begin today.

And here's some final food for thought: For both of the patterns described above, when the outside day instead closed down (and below the open), the next two days were, more often than not, up days for ARRY.

“Logic” is one thing, historical performance is another. It’s not a guarantee, but it always helps to know the probabilities.

Today’s numbers (all times ET): “Quadruple witching” expiration, Industrial Production (9:15 a.m.), Consumer Sentiment (10 a.m.), JOLTS (10 a.m.).

Today’s earnings include: Buckle (BKE).

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