I recently had a friend on Facebook ask what I thought about a particular stock. Instead of responding on FB with a chart, I decided I would breakdown the share price with a couple of charts and also provide some links as appropriate.
The stock was Vericel Corporation (VCEL). This is a biotechnology stock from the cursory review that I did. It appears that company produces a drug that helps with arthritis in the knee area. For more information about the company, visit their website.
With the background all set-up now, let's jump to what I like to do - look at charts!
Vericel Corporation (VCEL)
This first chart is a 5 year monthly candlestick chart for Vericel Corporation (VCEL). You might notice that VCEL does not yet have 5 years of history though as this is a relatively new public company. Chart analysis and technical analysis can be a little trickier sometimes because of the lack of chart history.
There are a few items that can be ascertained from this 5 year chart though, let's take a look.
By connecting a couple candlesticks low share price and then running a parallel line to it, a preliminary Trading Channel could be identified. On its most basic level, this Trading Channel suggests purchasing shares below the mid-point of the channel and selling those shares above the mid-point. The mid-point is represented by the dotted line.
From a price & volume approach, you typically want to see increased buying momentum and increasing buying volume for a prolonged break-out for a stock.
This Trading Channel does not provide enough detail for shorter-term investing. So I am going to take a different approach to creating channels and see if it can provide more "tradeable" suggestions.
VCEL - Trading Channels
This is a 1 year daily candlestick chart for VCEL. I started out with 2 horizontal lines to try and capture most of VCEL's consolidation over the last year. The width of the Trading Channel was approximately $.95, just shy of $1.
Other than the trading channel to capture the consolidation activity, I also have a short-term trendline for the current uptrend that began after its last earnings report. Because a pullback has started after its recent pop, a Fibonacci Retracement Tool was placed on the uptrend to look for pullback support areas.
I also identified a support area with the purple channel. The purple channel support area is from a Rising Window candlestick pattern, better known as a gap-up.
VCEL's share price sits right on its breakout area around the $3 mark. If the $3 area cannot hold this new breakout, the $2.60 area below should. A failure of the $2.60 area and another drawn out shake-out over a couple month period could be expected. That would mean one more trip to the $2 area.
Using a scale-in strategy is best in these types of stocks rather than trying to be "all in" or "all out". This is especially true for public companies that do not have a lot of chart history to analyze.
However, now that I calculated a $.95 channel width, I added a few more trendlines at $.95 intervals and extended them out to the left on this next chart. I extended them out to the left to see how these trendlines correspond with previous chart history. It is amazing the correlations that can be discovered at times.
VCEL - Trading Channels Development
This is a 2 year daily candlestick chart for VCEL with a look at the development of channels for VCEL's chart. These trading channels are used mostly for trading purposes. Knowing which channel VCEL is going to be in is the first thing. Then buy in the bottom half of that channel and sell in the top half of the channel. Rinse and repeat until the stock makes a move to the next channel above or below.
Now one other thing I did was take the purple channel from the above chart that was created by the recent gap-up. I extended that gap-up back to the left side of the chart and viola! Look how nicely this current gap captured previous chart history.
The way I label my charts is as follows: green trendlines are supporting trendlines; red trendlines are resistance trendlines; purple channels are from gap-ups or gap-downs.
VCEL - Fibonacci Tools Added
This is the same 2 year daily candlestick chart for VCEL with the new trading channels, but I've also overlaid 2 Fibonacci Tools on the chart to see determine the probability of future price action when combined with the trading channel analysis. Let's see what this chart says.
Most stocks perform a 50% Retracement of their previous move. Vericel Corporation (VCEL) was no exception and just completed a 50% retracement of its previous downtrend. There is strong overhead resistance in the $3.75 - $4 area. That is based on the number of trendlines and Fibonacci lines in that area. Areas that have a confluence of trendlines and Fibonacci lines create strong support and resistance areas. Something to note and use as a trading tool for future price movements for VCEL.
The first time a strong support area is re-tested, that is a buying opportunity because a strong support area always rebounds from its first re-test. If it doesn't, you probably didn't identify the support areas correctly. Not all support and resistance areas are created equally. For example, there is some pretty strong resistance in the $3.60 - $4 area. Once the $4 area is breached, a run-up to the $5 area is probable, with a trading opportunity around the 50% Retracement Line.
Any initial move to a strong resistance area is a selling opportunity with a quick buy back at a 10-20% discount in the near future. These trading opportunities are where I like to increase the number of shares purchased and have more shares for the next leg up if possible.
The Fibonacci Extension Tool (blue colored) shows that any significant "pop" of VCEL's share price would most likely be capped at the $6.96 area, a definite sell point. However a move of that magnitude would need to start with a sharp rebound from VCEL's short-term trendline around the $3.75 area and go on to develop into a Bullish Impulse wave pattern. Impulse wave patterns are used to advance a stock's share price up or down. A Bullish Impulse wave pattern advances share prices to the upside.
Vericel Corporation (VCEL) - Summary
This biotechnology stock could have a bright future ahead of itself. For someone that has a long-term timeline (greater than 1 year, preferably 2 -3), using a scale-in strategy to build into a position with VCEL could pay off significantly over the long-term.
Using different support and resistance areas along the way to buy and sell shares can help you lock in even more gains than buying and holding. While trendlines and Fibonacci tools were discussed in this article, knowing how to monitor an uptrend for a Bullish Impulse wave pattern that is verified by the use of candlestick patterns can definitely help increase those trading successes.
I discuss a lot of different trading methods in my articles all the time, depending upon the charts and the situation. VCEL could be a decent long-term play as long as biotechnology can stay out of the Twitter feeds.