Trade Idea of the Day: Short Vertex

Vertex Pharmaceuticals VRTX has a technical set-up that had gone from bad to worse entering the second half of 2013.

Now, it has become downright ugly.

While recent weakness in Biotech XBI has put some pressure on Vertex, the company did itself no favors with an absolutely abysmal Q3 earnings announcement on October 29th. Vertex reported EPS of -$0.32, which was far worse than the consensus for a loss of -$0.18. Q3 revenues missed by a mile as well, $221.7M vs. expectations for $275.1M. Vertex added insult to injury by lowering revenue guidance.

Following the earnings announcement, Vertex was (not surprisingly) downgraded by a few ratings firms, and the stock spent the first week of November in free-fall.

Moving on to the technical set-up itself, it is clear that Vertex is now in an established intermediate-term downtrend. The stock has been making lower highs and lower lows since its peak in mid-July, showcasing a clear downward sloping channel. To make matters worse, Vertex is still in the process of filling an open gap down to $54.14 that was opened in mid-April.

So, to recap Vertex's situation, we have: A gap-fill down to $54.14 in progress, weakness in Biotech, clearly established intermediate- and short-term down-trends, a downward sloping channel, recent analyst downgrades, and an extremely weak Q3 earnings report that dampened expectations moving forward. 

The most logical move here would be a retest of the mid-November turnaround lows at $60, so taking profits just above that level on a move to $61.60 seems safer, rather than waiting for a true test of the closing lows. Should buyers step in here, covering on a turnaround at $66.75 makes sense, as Biotech stocks are volatile. Even though the set-up here stinks, there's no telling what could happen with some upward momentum. The reward to risk ratio of this short from current prices is 1.58 : 1, with a potential gain of 4.87 percent on a successful short to $61.60.

Those with patience could play longer-term for a filling of the gap to $54.14, netting a potential 16.4 percent on the short-trade. Either way, Short Vertex is the Trade idea of the Day for the second time in just two months.

When to Consider Entering the Trade:

At current prices (~$64.72) or below.

When to Consider Exiting the Trade:
At a close above $66.75 (Cover) / A close below of $61.60 (Profit-Taking)

Disclosure: At the time of publication the editor and affiliated companies own the following positions: None

Note: Positions may be bought or sold while this publication is in circulation without notice.

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