Thankfully, not the 70’s Dance craze!  I’m talking about a stock.

Discovery Laboratories, Inc. (DSCO) has been a popular topic on the boards lately.  Especially in September when positive FDA news about their signature drug, Surfaxin, made the stock skyrocket.  The news was good but not spectacular.  It was merely an acknowledgment by the FDA that DSCO proposed improved testing program for Surfaxin was  “reasonable”.  Surfaxin is their drug that is aimed at treating respiratory distress syndrome in premature infants.  In addition, DSCO received guidance from the FDA on the design of its proposed limited clinical trial.

But, the market saw this as a huge endorsement for the company who had been experiencing some LONG delays in the approval process for Surfaxin.

The chart tells a compelling story:

• Upside volume resulted in two large spikes…the first (before the news came out) drove the price to $1.10, the second (when the news came out) drove the price intraday to $1.70
• Since that time, the stock has given back much of that gain to trade today at $0.94
• It appears that the stock is basing at this level and has support at around 94 cents
• The MACD is still indicating bearishness
• Stochastics indicate the stock is oversold

According to Yahoo! Finance, DSCO had a 115.27 million-share float with a short interest float 14.71 million (12.79%) of  as of Sept. 25, up from 12.46% the previous month.  A relatively low percentage of 4.93% of the company’s shares were held by insider and another 36.8% was owned by institutions.

It appears that DSCO continues to be a playground for the short sellers.  Traders should be aware of that fact for both positive and negative reasons.  If the shares advance, it could unleash a torrent of buying to cover those shorts.  If the short sellers sense weakness in the stock, they will short it into the ground.

Here is the chart:

The last item concerns DSCO to hang on long enough to get Surfaxin and other pipeline drugs approved and selling.  Looking at their fins, I see a company that is set up for the long haul….good cash balances, great liquidity ratios, minimal debt.  It looks like DSCO has some staying power which is crucial in the pharma and biotech sector.

Radar this one and watch it closely.  It may give back more of its gain in the next few days, but I see a turn to the positive  coming soon.

Good luck and good trading

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