From worst to first

09/23/20
  • Denali (DNLI) hit correction territory Tuesday after scaling record heights
  • Last leg of rally fueled by Biogen partnership
  • Shares still up 185%-plus since March, 100% YTD

Call options for Denali Therapeutics (DNLI) are a lot cheaper than they were a few days ago, thanks to the biopharma stock’s Monday–Tuesday retreat from last week’s record highs.

For example, the October $35 calls were priced around $3.10 yesterday morning, a 41% drop from last Friday when DNLI shares hit an all-time high of $39.22 (a little shy of their average Street price target of $40.711). At yesterday’s low of $33.68, the stock was off nearly 13% from that record.

Still, as the following weekly chart shows, DNLI was still up more than 100% on the year after paring a  216% rally off its March bottom, which tested the stock’s July 2018 all-time low:

Chart 1: Denali Therapeutics, 12/8/17–9/22/20. Denali Therapeutics (DNLI) weekly price chart. Record run in 2020.

Source: Power E*TRADE


The stock’s personal run from worst to first in the space of six months essentially broke DNLI out of a huge, multi-year trading range from roughly $13–$26, with the last leg of the run-up occurring after Biogen (BIIB) announced in early August that it was pumping nearly a half-billion dollars into Denali to partner on a treatment for Parkinson’s Disease.2

That announcement shows up as the big up gap on the following daily chart, which sheds light on a few other aspects of DNLI’s recent price action:

Chart 2: Denali Therapeutics, 1/10/20–9/22/20. Denali Therapeutics (DNLI) price chart. Pulled back into range.

Source: U.S. Census Bureau


First, the up gap marked a breakout above the resistance zone containing the stock’s January and June highs. The stock then consolidated for two months, twice pulling back to—and rallying off—the resistance/breakout level that has now transitioned into support.

A second breakout—this one out of the more recent consolidation—pushed the stock to last week’s records, before this week’s pullback dropped shares back into that range.

Another test of a conspicuous technical level—and another pullback opportunity for bulls? Many traders would argue that since the stock has been more or less “following” the major technical guideposts on its chart for several months, these may continue to be useful until proven otherwise.

In this case, that logic could translate as: A retreat into the trading range that preceded last week’s breakout—as long as it ultimately didn’t extend too far below the bottom of the range (i.e., the August 12 low of $28.62)—would constitute a potential opportunity for DNLI bulls.

Such technical reference points are never the final word on what prices will do, but until they fail, traders tend to listen to what they have to say.

Market Mover Update: Tuesday’s existing home sales number for August topped expectations at six million—its highest level in more than 10 years. Homebuilders took the news and ran with it, including KB Home (KBH), which rallied to a new all-time high even before its after-the-bell earnings release (see “Housing stock rally gets a test”).

Today’s numbers (all times ET): FHFA House Price Index (9 a.m.), PMI Composite Flash (9:45 a.m.), Jerome Powell Speaks (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: JinkoSolar (JKS), Cintas (CTAS), General Mills (GIS).

 

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1 TipRanks. Denali Therapeutics Stock Forecast and Price Targets. 9/22/20.

2 MarketWatch.com. Denali Therapeutics stock rockets into record territory after Biogen investment and collaboration. 8/6/20.

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