What I have to say about Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) is based on technical analysis, with no reference to the significance of information the company has supplied investors, whether through its financial report or in its guidance.
Technically, Teva is just another company that published a financial report. Trading in the share the next day is problematic, with the potential for sharp corrections. It seems that the chances of a sharp downwards correction are greater than the chances of significant movement upwards. Just ten days ago, Microsoft Corp. (Nasdaq:MSFT) plummeted in a similar manner, as did many other good companies, including Cisco Systems Inc. (Nasdaq:CSCO), which fell on Wednesday. The fall is usually followed by a period of stability, and a lengthy upward correction begins.
It should be remembered that for companies such as Microsoft, Teva, and the like, a drop of over 10% is no small matter, except when it caused by an unexpected event, such as the removal of Vioxx from the shelves in the case of Merck & Co. (NYS:MRK). The chances that the share will stabilize and correct upwards are not small, especially in view of the institutional strength in these shares.
However, it should be borne in mind that, because of the institutional strength, if Teva corrects upwards, there will be those who will exploit this to reduce their positions. There are now a lot of investment managers who have to provide explanations for their large positions in Teva. If the share will let them, they will reduce their positions at convenient price levels. But this is a vision for the future. First, let’s see if Teva is capable of an upward correction.
Teva’s immediate test is the test of the 200-day moving average, which the share crossed on its way down. This average joins the horizontal resistance level and is waiting for the share at $39. Movement above $39 will be a very positive indication for the share, whereas an upward correction up to $39, and a decline from this level, will indicate a significant change in trend.
This is one of the tests of the intentions of the investment institutions. Technically, there is a good chance of support at $37.50, and attempts to rise from this level. As yet, there is no need to worry about the southward crossing of the 200-day moving average. It still has to prove itself. Movement below $37.50 will indicate that Teva will probably continue to slide.
Therefore, the most reasonable strategy is to buy at over $37.50, buy more at over $39, and hedge below $37.50. There is a good chance of support above $37.50.
Shareholders who think that Teva will correct upwards, but not by much in the short term, can buy in the money Call options for the quantity of shares they own, and cover the investment with writing two out of money Call options against the shares and options purchased. This is a normal rehabilitation strategy.
This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
This review was written before the opening of Thursday trading in New York.
Published by Globes [online], Israel business news - www.globes.co.il - on May 11, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006