Wolf in Sheep’s Dojis

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End of quarter window dressing or not, it is tough to deny that Monday was as impressive a showing for the bulls as you will see, particularly when you assess the breakout held on the Russell 2000 small cap index. Frankly, there are way too many charts for me to present to you that essentially detail the same scenario–A strong attempt at a breakout from a multi-week consolidation.

Thus, I want to focus on one particular setup this evening in easily one of the hottest sectors in 2012. Biotechnology stocks started off 2012 on a tear, and subsequently gave us the oh-so-pretty high and tight consolidation for nearly five weeks. On Monday, the IBB, ETF for the biotechs, surpassed its 52-week highs, presumably ready to make a valiant attempt at another leg higher.

Indeed, there are quite a few biotechs in my portfolio inside 12631. I can safely say the biotechs, along with the retail/consumer discretionary stocks, are where I have focused most of my portfolio this year. One stock that I am eyeing for a new trade is Nektar Therapeutics. For roughly thirteen months from October 2010 until November 2011, the stock was absolutely decimated, losing about 70% of its value.

Recently, though, the stock has made progress in acting more constructively. Since last November’s low, the stock has carved out higher highs and higher lows on a noticeably improved bullish volume pattern. In addition, the stock has been consolidating over the past three-plus weeks in what is known as a “doji string,” with a series of small-bodied candles, denoting mild indecision. Of equal importance, the doji string has come on benign volume denoting a lack of violent indecision underneath the surface.

As always, context and objectivity are crucial when analyzing the technicals. Here, NKTR has absorbed its recent advance in a unique manner with the doji string, a rare but powerful pattern that looks innocent enough, but is actually something to note. What the doji string denotes, especially one of this length, is a pronounced period of compression where sellers were unable to make any progress at all.

We know that periods of compression on a chart often lead to periods of explosion. As such, Monday’s uptick in buy volume to accompany the attempted breakout should put you on watch for an explosive resolution up and out of the wolf doji string in sheep’s clothing, for a hot stock in a hot sector.

Also note that after-hours weakness in NKTR is likely due to MAPP negative news. I would be looking at the $7.60 breakout level to hold tomorrow, and do not expect the news to destroy the overall pattern.

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