Technically speaking, the rubber has been testing the road in biotech giant Gilead Sciences, Inc. (GILD); and unfortunately shares of GILD stock could be skidding lower.
For the bulls out there, I get it — GILD is obviously cheap fundamentally. Gilead Sciences is also one of those wide moat biotechs with strong management, which makes the company even more attractive to value hunting investors.
In fact, back in late January I wrote up an optimistic defense using a slightly out-of-the-money bull call spread in GILD based on just that sort of evidence—but ultimately to no avail.
Despite the S&P 500’s own massive rally over this time span, GILD is essentially unchanged. Which begs the question — why?
For our part, the original analysis wasn’t totally convinced Gilead Sciences might not be a value trap in bull’s clothes. Potential increased competition in the hepatitis C market, as well as an ambiguous stock chart were discussed as caveats or threats for GILD and getting back to a more normalized price multiple.
And while neither of those raised concerns have resolved themselves yet; the latter increasingly favors a more bearish resolution for GILD. Let me explain.
GILD Stock Weekly Chart
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Given the subsequent weak-looking rally in GILD relative to the broader market and newly formed bearish flag or return move centered at prior triple bottom support — a downside price resolution in GILD appears forthcoming.
For the bearish pattern to fully take hold, a move through support from $86 to $86.75 based on weekly candle confirmation or a fresh price break through the neckline is required.
At the same time, the reward is potentially much greater as technically, GILD’s downside looks enormous.
Based on the stock’s Fibonacci cycle from its 2010 low to 2015 high, a move to the 50% retracement level or fulfilling a conservative head and shoulder measured move of $30 would put GILD in the $56 to $68 area before possibly recovering.
Your GILD Stock Options Play
Reviewing Gilead’s stock options, the August $82.50/$70 bear put spread for up to $3 is attractive.
This GILD spread allows for a return of more than 300% below $70 at expiration and gives ample time on the calendar for the bearish pattern to play out toward or into the discussed support area.
In the event that Gilead’s assessed value trap situation resolves itself to the upside, using a stop loss makes technical and economic sense.
Using pattern resistance and a little extra wiggle room, a stop-loss in GILD from $92 to $93 is estimated to contain the spread trader’s loss in the near term to roughly 75 cents to a dollar based on initial directional risk of 20 cents per dollar move in GILD stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
