Last week was one some of us would like to forget. The day to day market swings provided for day trading opportunities aplenty, but I would reckon more than a few traders went home with heartburn after the close on Friday. The old Dow 40 days have become Dow 400 days and 50 plus point swings on the /ES have become the norm.
It’s important to keep in mind that not all stocks follow “the market” during turbulent times. One in particular that has been incredibly strong is $ICPT.
If you think back to your old statistics days you may remember The Pearson Correlation Coefficient (r). This simply measures the linear strength between two variables. A +1.00 r value is a perfect positive correlation, a -1.00 r value is a perfect negative correlation and a 0 r value means there is no correlation between the two variables. While this may conjure up old nightmares for some who didn’t appreciate stats class, a simple understanding of this is particularly useful in stock picking.
While the SPX chopped market participants to death and spit them out last week, ICPT made a break out above its recent consolidation range.
How can this be? Like I mentioned earlier, we are still in an environment where many stocks are doing their own thing, not hostage the index movement. Optuma software has a study called the 100 period correlation coefficient that can easily be added to any chart. The study at the bottom of the chart above is just that. It plots (r) relative to a benchmark, in this case I used the S&P 500. We can see that currently there is a near 0 linear correlation between the SPX and ICPT – the reason why when the index fell sharply on Friday, ICPT continued its way higher.
Those familiar with volume profile can see the volume pocket directly above that ICPT is making its way into. If it plays out as expected, ICPT could fill the volume pocket fairly quickly moving up to about $90 per share. Which would make sense as the width of the rectangle is about 20 points and we add that 20 to the breakout level which is $70.
I am in the May 70 calls already with a more than handsome gain, but am expecting more to come from this biotech stock in the coming weeks.
Good luck out there this week!
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