Generex Falls On News Reversal

The market can look any gift horse in the mouth. Take the selling Wednesday in Generex Biotechnology after the stock gapped up on positive news about its oral insulin spray.

The Toronto-based company's (GNBT | Quote | Chart | News | PowerRating) oral insulin spray holds the promise of freeing diabetics from having to administer insulin by daily injections. Before Wednesday's open, Generex announced that U.S. drug giant Eli Lilly (LLY | Quote | Chart | News | PowerRating) has agreed to market the spray, pay for final clinical trials and cover the cost of obtaining regulatory approval for the product.

Shares in Generex gapped up on the news, then ran smack into selling pressure. Given the stock's high-volume price run-up over the past two weeks, anyone looking at the Lilly news before the open would have to wonder what the market was discounting! A little forethought would be enough to watch out for this one.

This is a classic news reversal. TradingMarkets' Larry Connors developed a technique for trading news reversals for futures, although it can work with stocks as well. For more on this trading tactic, check out Daniel P. Delaney's lesson, Trading News Reversals.

By the end of the session, buyers came in to take Generex shares off the lows, but shares still closed off 2 1/16 to 20 5/16. I'd stay clear of this one. Look at the huge price range -- more than seven points, many times greater than the stock's Average True Range over the past 50 days. (See chart.) 

The extreme price range, combined with heavy volume and a close near the middle of the day's range all suggest a battle royal between big buyers and big sellers. You don't want to get in the middle of that kind of fight. 

You want to short stocks when you sense selling pressure (supply) is about to overwhelm buying pressure (demand). You want to go long when you detect demand is overcoming supply. You don't want to get caught in the middle of a tug of war between institutions.

For more on Average True Range, check out Dave Landry's lesson, Introduction to Volatility.