Bristol-Myers Squibb Co: The BMY Freefall Is Overdone

Bristol-Myers Squibb Co (NYSE:BMY) shares have dropped nearly 20% since Friday’s open after the company said a trial for once-promising lung cancer drug Opdivo failed. The technical damage in the near-term on the charts of BMY stock is significant. However, Squibb shares are arriving at a promising support zone, where either buying stock or selling options spreads might just make you a pretty penny.

Beat the Bell: Bristol-Myers Squibb (BMY) stockInvestors and traders in pharmaceutical stocks — and particularly those in the biotechnology industry — are well-aware of what can happen to a stock after a surprising drug trial failure or success. Through that lens, the big two-day drawdown in BMY stock isn’t exactly a massive surprise. But given the size of Bristol-Myers Squibb, this selloff does look to be somewhat overdone.

In reaction to the negative news out of Bristol-Myers shares of competitor Merck & Co., Inc. (NYSE:MRK) rallied strongly last Friday as its competitor drug to Opdivo now becomes the focus of hope.

BMY Stock Charts

Starting off with the multiyear picture, we see that as a result of the two-day selloff, BMY stock has now broken below its 2013 support line and the orderly uptrending channel. Just two days ago, Bristol-Myers Squibb was trading near the very upper end of this channel and is threatening to break this multiyear channel.

Note that the lower end of the channel also lines up with the blue 100-week simple moving average, thus creating a technical confluence support zone around the low to mid-$60s.

Importantly, however, while this trading channel is now broken on a daily closing basis, on a weekly closing basis, the channel has not yet broken. In other words, there is still hope that, come this Friday, BMY shares rally a little and close the week back inside the lower support line of this channel. And there’s plenty of precedence for this.

Bristol-Myers Squibb BMY stock chart
Click to Enlarge

On the daily chart, we see that while this so far two-day drop in BMY stock has sliced right through and below the stock’s medium-term moving averages, Squibb is now also arriving at a better horizontal technical support area, which I marked with the gray box. This support area has held as support since late 2014 and spans from around $58 up to about $61.

Bristol-Myers Squibb BMY stock daily chart
Click to Enlarge

Also note that the two-day selling spree so far has led to a rally in implied volatility in Bristol-Myers Squibb’s options. Option sellers that think downside in BMY stock is floored for the next few weeks can take advantage by selling out-of-the-money puts or put spreads.

More directional traders could look to leg into partial long positions in BMY itself and adding to it upon a notable bullish reversal. Should the stock close below the $58 meaningfully on a weekly closing basis, the trajectory of the stock could point lower still.

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