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Putting Amgen in Context

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Phil Erlanger's Buzz & Banter post on Amgen (AMGN) raises a number of interesting points, all of which can help illustrate why understanding context is so important. If I understand correctly, the takeaway is that after a period of consolidation in August, the short intensity has turned heavy at 79% and is therefore growing increasingly bullish given the Erlanger Short Ratio and Options Rank.

Meanwhile, according to a cursory look at a point & figure chart of AMGN (see charts below courtesy Dorsey Wright), the stock remains on a sell signal, a double bottom break that occurred in August with the 79 print, and a DeMark TD-Sequential 13 (a potential exhaustion setup) has occurred on the daily chart.

The reason context is so important is that the point & figure sell signal, and the potential daily exhaustion setup, are occurring within the context of a long-term positive trend for the stock on a point & figure basis, and also within the context of a longer-term vertical price objective of 90 based on the December breakout on the 2x3 chart.

While AMGN did give a point & figure sell signal with the double bottom break recently, the primary trend is positive. This means the "sell" signal is occurring within a positive context. A more ideal setup would be a "sell" that also changes the overall context, i.e. a sell signal that also violates a trendline, or which occurs after a significant trendline has already been broken

In the case of AMGN, it could pul back to the 73-74 area (and incidentally, the downside price objective based on the vertical count is 73) and still be technically "healthy" longer-term. The problem is that the move toward that level, were it to occur, would be "corrective," not "impulsive." I do not want to short corrective moves (that is practically the definition of picking up dimes in front of a bulldozer).

With literally thousands of stocks in the universe that one can trade, it makes little sense to me to trade short against a positive context, or long against a negative context. Downside in both cases is too great compared to the potential reward.

Amgen Inc. (AMGN)

Amgen Inc. (AMGN) (2x3)


No positions in stocks mentioned.

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