Buying Arena Pharmaceuticals before Wednesday is Gambling

How Do You Define Gambling vs Investing?

Some people would call any money placed into a stock a gamble. Others would say that the difference is that you can control risk when you trade or invest. Although I agree about risk control in trading, you generally cannot lose more than you bet in gambling either, so I don’t buy that definition. But then I trade off of technicals so most investors think that everything I do is gambling. How does someone that trades off of lines on a chart and a feel for sentiment define gambling. Simple.

Buying Arena Pharmaceuticals before the FDA Decision Wednesday.

Ok, if there are any of you are still left to read this now that I have upset the your fairytale let me explain why. The daily chart below for Arena Pharmaceuticals, $ARNA, shows that the stock has run up over $8 or 325% since getting an FDA Advisory approval May 10. Let me repeat that in bold 325%. That is a lot by the way. In doing so it has also moved the technical indicators to extreme overbought conditions. The Relative Strength Index (RSI) at over 92 is incredibly high. In fact the weekly RSI is also in the high 80’s. This is an oscillator that can only travel between zero and 1 and it is at 0.92. That should raise some caution flags. It is also 128% above its 50 day Simple

Moving Average (SMA). Do you know how many other stocks are more than 100% percent over their 50 day SMA? If you limit market cap to over $50 million the answer is zero. Not one. If you look at sentiment it gets worse. Below is the Stocktwits Heat Map for the Heathcare Sector. The size of the box is relative to the number of posts about the stock. This is a $3 billion company that is part of more than 2/3 of the discussions of all Healthcare stocks. I would say that sentiment is elevated.

No screw it, it is off the charts. Stocks can stay overbought for a long time and sentiment can certainly go higher. I understand that and I am not advocating that you sell the stock if have participated in the run up. It probably would not be a bad idea to take some profits or to hedge your position with some downside puts or a collar. But if you are planning on buying this stock now and not selling it before Wednesday then you are just gambling.

Disclosure: I have a long biased position, short June 29 Weekly 6 Strike Puts, as of this writing.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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