Don’t try to rationalize this bearish idea too much - it’s simply a trade based more on the chart and less on the stock’s value. It’s just an idea I thought was interesting enough to mention it in the blog, but a little too risky to add it to our list of newsletter-recommended trades (which has a wider audience).

From a fundamental perspective, AMAG Pharmaceuticals Inc. (AMAG) looks fairly compelling. The FDA accepted a new drug application (feraheme) request a few days ago.

However, the stock is technically overbought, and this may be a great example of what they mean by “buy the rumor, sell the news”.

The market knew the request’s acceptance was likely, and ran the stock up (before the announcement was made) through May 12th… the last day of the rally. As of May 13th (after the news was known), every day has been a struggle just to hold the stock up. In fact, we’ve seen lower lows and mildly lower closes since then - an omen of what traders are quietly thinking. It’s likely to get worse before it gets better, as profit taking becomes more of a necessity than a choice.

No matter what though, there’s a time limit on any downtrend. At the very most you don’t want to be in a short trade on AMAG past June 29th, and maybe even before that. That’s the expected deadline for an FDA decision regarding feraheme for a different medical use.

The decision could possibly come sooner though, so be careful. In the meantime though, there’s a lot of ground to retrace following a hype-based rally.

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