Tech Talk: Playing the Dead Cat Bounce

As you no doubt heard, pharmaceutical giant Bristol Myers Squib’s test of a cancer drug didn’t get the results it wanted. The result was a crash in the stock, briefly taking a good performer down to last February’s levels.

Then prices began to recover. So what’s up? What we are seeing here might be a dead cat bounce – a bit of black humour based on the idea that, when you throw a dead cat out the window it does bounce when it hits the ground.

In technical terms, BMY fits the classic description of being ready for a bounce. Dead cats are a response to a large drop in price, on extremely high volume – in this case, the highest volume since late 2010, when good news accompanied an upward surge in the company’s price.

If I’m right and there will be an upward move in the price, it will be fairly short-lived. Usually dead cats are over and done in two or three days. After that, prices continue their downward march – for a while, at least.

All of this said, it’s important to remember that BMY is a hugely successful pharmaceutical company. After bottoming at about $12 in the crash of 2009, it touched $75 only days ago. It’s too big and innovative for one product to lead to a collapse. That isn’t a recommendation, of course.  I never make buy or sell recommendations.

Incidentally, in this story BMY has a doppelgänger that is worth a look. As the following chart shows, competitor Merck and Co. has benefited quite nicely from BMY’s woes – also on high volume. It seems that Merck competing cancer drug now looks more promising.

By the way, I own shares in both companies.