There’s a beaten-down biotech that may be worth the shot. The biotech sector has been on fire as of late. The SPDR S & P Biotech ETF (XBI) is up 25% year-to-date and trading at 52-week highs. It continues to be one of the best sectors over the past six months, has momentum and room to run higher. However, individually picking the right biotech stock comes with high risk. One such name is Sarepta (SRPT) . The stock is lower by 81% year-to-date and much of the weakness is due to safety issues with its Duchenne muscular dystrophy drug Elevidys. They are currently waiting for the FDA to define and publish its final safety guidelines for their gene therapies. That’s the clear headline risk, but let’s look at the technical levels. Here is where I see potential. As a technician and professor of technical analysis, I always look for the strongest trends and the best vehicles to trade from a risk/reward perspective. The “trend is your friend” has proven true over time, but I am always looking for potential to jump in when a trend may be changing. My checklist is quite simple when looking for a reversal: Has the stock stopped going down? Does it have something to reverse? Have we broken our longer-term downtrend? Are we trading above key moving averages? Are momentum indicators in the MACD and RSI flashing buy signals? When in doubt — back it out. How does it look on multiple time frames? Looking at the one-year daily chart, we notice some very positive signs. Step One: Shares have finally found a bottom. Since their intraday low day at $10.41 in August, shares have consistently made a series of higher lows and never retested the low. Step Two : Shares of the stock are lower by 81% year-to-date. Price has rallied into the gap caused in June after the company provided a safety update for its muscular dystrophy drug Elevidys. Shares dropped 40% on news that a patient died due to acute liver failure and is now waiting for FDA guidance after submitting their own panel’s recommendations as they have suspended shipments of the drug for non-ambulatory patients. As investors wait for the news, the stock is now starting to rally and filling that downward gap. That gap fill has upside of roughly 50% from current levels. So yes — there’s something to reverse and it’s just beginning . Step Three: The downtrend that extended from the March highs was just broken in late September — something has changed. Step Four: Not only has the stock recaptured its 50-day moving average, but it has also consistently trended above it since August. That average has acted as support and is now turning higher. Step Five: This is the one gray area. Momentum indicators aren’t screaming buy at current levels. We did experience buy signals in July but now they are non-factors in any decision. So, we skip to step six and look at the chart on a wider time frame to see if it can confirm our original thesis. Step Six: When in doubt, back it out, let’s look at the chart on a 5-year weekly basis. Here we see that every item on our checklist gets as both the longer-term RSI and MACD momentum indicators — see step five — have flashed buy signals and have room to run higher. The longer-term chart helped confirm out thesis. The Trade Given the potential drug news, this is a high risk/high reward trade. We will also get another news event in earnings on November 3. Last quarter the stock snapped a six-quarter losing streak and gained 10.5% after reporting. Let’s see if they can do two in a row. Recent price action is giving us a better reward scenario with upside targets of $34 and $43. To manage risk, downside stops should be set. That stop level depends on your personal pain threshold. A stop under $20 below current support could limit a loss to just over 10% with an upside potential of 50%. It may be worth the shot… DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
