Genentech (DNA) Example: Longer-Term Trading

In a comment to my last post, John W points out that DNA may not be a great buy-and-hold candidate:

Let’s say you get about 19 points in the next 5 years that takes it from today at 81 to 100. Thats about 20% which parses out to about 4% a year rough averaging - currently you can get 5.25% out of 6 month CDs

I’m not exactly sure where the 19 points in 5 years comes from (Genentech’s up about 300% in the last 5 years), but I agree with John’s conclusion. I think “buy-and-hope” is mostly a successful marketing phrase repeated at every opportunity by people who want you to give them your money.

I thought I was relatively clear that I was not recommending for anyone to run out and buy Genentech at the current level of 81, or any other stock at any level, based on anticipated increases in revenue or another fundamental measure. But I’m very grateful for observations such as John’s, because it helps to remind me of something I’ve said in past posts, which is that the market is an elephant and we are blind men, in that we can all look at the same picture and see it in completely different ways. I see a potential swing trade setup on a breakout, others see what they judge to be a low-reward candidate for a long-term position. That’s wonderful, because it’s what “makes a market,” and explains why some people are buying while others are selling.

I can honestly say that the concept of “5 years” when it comes to the stock market never crosses my mind. I can only think of two instances where I’d be in a stock for five years:

  • I get into a swing trade which proceeds to go in the direction of my entry for five years straight without ever hitting my trailing stop, for a multi-thousand percent gain. I don’t think that’s possible, but here’s to hoping!
  • I die with an open position, and my daughters don’t realize it for 5 years.

This really got me to thinking- if I had the patience to watch a stock over the years and stay in a position for months (I don’t), what would someone like me see in a stock like DNA? Of course I went directly to The Charts, and what I discovered was surprising.

Caution: This is total hindsight, and everything’s always easier and clearer in hindsight. But it was very educational for me, and hopefully some other folks will find it of use. I’ve tried to annotate each chart and describe what I see [tips hat to Michelle B.].

Let’s start back in 2003.

In the Spring of ‘03, Genentech had gone (yawn) nowhere for a solid year:

DNA

What I see in this chart is a long, long range with a top right at 20.00. I do see a hi-volume day in September which (surprise!) marks a near-term bottom. That’s more my speed. Anyway, back to the big picture.

On 5/19/03 we finally got a breakout:

DNA

A big gap up on huge volume. Not a day to trade, but a day to trade off of. Its high was 27.62, which would have triggered a long entry on the next day. On that entry, we would immediately begin trailing our stop. (I suppose this is the “imperial ‘we’”). We’re going to use more of a “Dave Landry”-type trailing stop, gradual and loosey-goosey, baby, allowing wiggle room for a longer trend to do its work.

DNA

That work continued for 11 months, ending with a bang on 4/26/04 with a shooting star on very high volume. This trend resulted in a 130% gain in 11 months, or about 140% annualized, (I hate “annualized” numbers, they’re misleading.. so I won’t use any more).

A reasonable trader, which I occasionally am, would have gotten out comfortably at least by the gap-closing failure to 59, or a 110% gain in 11 months.

From there, DNA fell into another sideways range for 9+ more months:

DNA

During this time, we’d be trading something (anything!) else, and waiting for a break of the range top around 55. BTW, note that big-volume day on 8/13/04. See how it cleanly marks a bottom? As I’ve said before, those bars can often act as support/resistance all by themselves. Love ‘em. Loooove ‘em.

We get a break of the big range, and a new trade entry, in March ‘05:

DNA

Getting long on that break would take you from just under 60 to over 90. A reasonable trailing stop would get triggered on the mid-September breakdown into the 80’s, for a net run of about 57-85, or a 50% gain in 5 months.

About a month later, another trade is triggered as the failure meets with strong buying and a classic “W” bottom is formed.

DNA

This trade runs up to 100 quickly, then fails back thru 94, the previous (September) high, and middle of a classic “M” top. Assuming an entry at 88 and a sale at 93, we’re stopped out for a gain of about 6 percent in 2 months.

After that stop, DNA dropped back into the 75-85 range, where it’s been going back and forth ever since:

DNA

The final analysis? With some intermediate swing-trading, we saw gains of 110%, 50% and 6% in trades where our money was exposed a total of 18 months. If we took no other trades, and kept our position size the same percentage of our account, those gains would have compounded on each other [(100% x 2.1 x 1.5 x 1.06)-100%)], for a total gain of just over 230% in 18 months of exposure since May ‘03, with an additional 24 months on the sidelines, twiddling our thumbs or whatever, but with no downside risk. Not bad action for a slow-moving $85 billion company, eh?

Could I duplicate that? Doubt it. I’m not that patient. (But after this little experiment, I think I might be adding some new “potentials” to the back of my play book.)

Could someone who can successfully manage trades that span months duplicate this? Absolutely.

This brings us back to today, and my last post. Due to politics and macroeconomics, a break above the current range (i.e. thru about 86) seems unlikely, but Genentech has Avastin, whose revenues will increase substantially, and if that’s enough to pop the chart back up, I’ll trade it. Another way to trade this, of course, would be a break down through the bottom of the range at 75. Either way, as always, wait for the break, grasshoppa, wait for the break. ;-)

 

8 Comments

  1. lloydphilip said,

    November 14, 2006 @ 6:39 pm

    Will,

    Man did you leave out anything? Now I have to have this on my watch list.

    LP

  2. Will said,

    November 14, 2006 @ 11:52 pm

    Lloyd- LOL! As my ex-wife used to say, ALRIGHT ALREADY! I just got to looking over DNA’s action and thought, “Hey, this thing makes some tradeable moves…” and then one thing led to another. One of the things I usually do when I’m narrowing down a list of swing or daytrade candidates is to delete any which don’t have a 52-week hi at least 200% of their 52-week lo. If I can develop the (very different) skill to trade longer timeframes and let the stops do the work just like on daytrades and short swings, I’m going to start taking some entries on these behemoths whose 52-week range isn’t quite as impressive.

    Thanks for the comment!

  3. lloydphilip said,

    November 15, 2006 @ 8:49 am

    Will,

    Speaking of tools. What tools do you use to search for daytrading candidates? I cancelled my TC2007 sub. as I need to cut down costs so that I may be able to hang in this thing a bit longer and wait for the bulb to turn on. But now I am stuck without any potential candidates. I have Trade-Ideas but I know that I’m not using its full potential plus its not an end of day tool. I would like to do some end of day prep work for the next day.

    Thanks,
    LP

  4. Will said,

    November 15, 2006 @ 1:06 pm

    Lloyd - (sorry about misspelling your name last time, it was late and I was goofy; I’ve fixed it)- I started a reply in the comments, but it got so long, I turned it into a separate post on the blog. Short answer, “All the free tools from Ameritrade.” I hope to have the post up later this evening.

  5. Michelle B said,

    November 19, 2006 @ 3:52 am

    Good stuff, Will. I am often asked how I learned some of the nifty things I know, and my response is that I let the market and charts teach me.

    One trick of mine is when I locate a great pattern after the fact, I block out the move with a piece of paper or my hand, and I focus on the stock action before the move, the pattern and price action that triggered the move in other words. You get better and better at this the more you do it. You become able to discern the important clues, via candlesticks, volume, moving averages, etc.

    It is possible to time stock moves on various timeframes even though some still say it is not!

    One headsup with swinging biotechs, either long or short, is that they are often the infamous ramper or disaster du jour because of their propensity to have positive and negative news which could move them in a direction 35% to 75% overnight. DNA could move big overnight not only because of its own clinical trial news but also because of positive/negative news released by their major competitors.

  6. Will said,

    November 19, 2006 @ 6:40 pm

    Michelle - thanks for the tips! I think you’ve shined a light on an often-overlooked gold nugget: we all love to look backwards and see those big gains, but it does very little for our trading. Doing as you suggest and looking very closely at what happened just before the big gain is where much of the magic lies, and where many of us fail to focus (he said as he cast his eyes down and kicked the dirt).

    Re: Ramper/disaster du jour - yah, acutely aware of these. I worked in drug research for a few years, and saw some, um, “curious” activities in “certain” companies’ stocks even during the “confidential” studies. Let’s just say that big gap on the day of the “news” is similar to a big gap on the first day of an IPO. The little guys scrambling to get in are buying it from someone who conveniently already owned it.

    Also (not sick yet? how ’bout another freakin’ anecdote?), a good friend was an extremely successful Rep. for Amgen, and their monster Epogen was his bread and butter. Back in late ‘04, he left after many years, cashed out his company stock and loaded up on the stock of the company that hired him away. That was Biogen, and he was gonna head up the Tysabri team. Well, you know what happened with Tysabri. Friday 2/25/05 BIIB closed at $67 and opened Monday 2/28 at $37. He lost YEARS worth of income, and I think we nearly lost him.

    Anyway, thanks as always for the visit and my e-door is always open for you and your insight.

  7. Michelle B said,

    November 20, 2006 @ 8:57 am

    Thanks for the AMGN/BIIB story. Wow!

  8. Setup on GOOG; More on StrategyDesk 1.0; Don’t Forget DNA • dummyspots.com said,

    February 1, 2007 @ 11:14 pm

    […] Any other Jungle Book fans out there? Well, either way, an Elephant Never Forgets. Last November I wrote a couple of pleasant little articles on Genentech (ticker: DNA). In the first one, I noted that a break of the 85-86 area could provide an entry for longer-term, um, investors. (If you’re reading ‘em, check out the follow-up post, as well.) […]

RSS feed for comments on this post