Synairgen shows how to play soaring prices

The announcement came from Synairgen (SNG), of course, and revealed that patients who received SNG001 had a 79 per cent lower risk of developing severe disease compared with the placebo, and that those who received SNG001 were more than twice as likely to recover from Covid-19 as those on placebo.

Now, these are exciting results. But they are Phase II results only and still need the heavy work, funding, and patience of undergoing a Phase III trial. However, in trading that doesn’t matter. What matters is the here and the now; the supply and the demand. If you don’t intend to stick around for longer than a few days, then it means there is very little background work to do, and you can play the cards in front of you for what they are worth – or rather what you feel the market will feel they are worth. That last point is especially pertinent. In a game of short-term speculation and hyped up emotion, fundamentals may as well be torn up and thrown in the bin (although it’s worth noting that any broker note that supports one’s short-term view tends to be lauded as “excellent research” by a company’s fans). 

Stocks can also fall out of favour just as quickly as they were in favour. Last week, it was Boohoo (Boo) with large volatility swings as they were accused of underpaying workers. The volatility is still higher than average, but traders need to go where the action is. A surfer can be the best in the world but if there aren’t waves – they will struggle. Like surfers, we need volatility – and this week it has been Synairgen.

Synairgen was a favourite of hero-to-zero Neil Woodford, a man who I think should be in front of the regulator rather than setting up another shop. The Times wrote that “If only people had placed more faith in the biotech genius of Neil Woodford”. Does a genius mean taking on excessive risk, stuffing an income portfolio with biotech specs, and abusing the trust of investors by using their money to do something the fund wasn’t intended for? If only people had overlooked this all of this and had faith, then yes, investors could have been rewarded with a huge share price rise from the result a speculative gamble. That is, of course, exactly what it is. Taking a position before a big announcement is a gamble. Sometimes these pay off, and sometimes they don’t. Last year, many were positioned long (and no doubt some on leverage) on Motif Bio (MTFB) in anticipation of The Food and Drug Administration (FDA) approving a drug. The FDA had helped design both Motif’s Phase III trials, REVIVE-1 and REVIVE-2, and so it was expected that it would grant this approval. Unfortunately, the FDA did not, and the price slumped 80 per cent on the day. However, it did then bounce back in a 200 per cent move from the lows, and this is where the opportunity lies for traders. Large gains are often made on the back of others’ pains, as prices snapback and revert to the mean which overshoots.

1. Synairgen’s rising fortunes

Chart 1 shows Synairgen’s fortunes, rising from below 10p in early 2020 and putting in a double top in Q2. It then halved and a new buyer took up the legacy Woodford stock in June. The buyer then turned seller, and began unwinding the stock creating an overhang. On 17th July, the Friday before the announcement, Acacia Research only had 2.14 per cent of Synairgen stock – down from the 14.28 per cent it purchased in June.

Surprise gap ups are usually a great pattern to trade, only in this example the market makers had completely shut off buying and selling online – perhaps due to the size of the reaction to news. They can do this, as they are only obliged to provide a two-way price over the phone, and so for the first few minutes of the day there were almost no trades. Breakaway gaps on good news will often see a rise, and a dip as people take profits, and a further rise continuing the trend.

Chart 2 shows the intraday chart of Synairgen. We can see the stock gap up and rise, then dip, and then power through the day’s high to go higher. One strategy I use for volatile intraday stocks is by using the 50-day exponential moving average (EMA) – the black line – as a reference point. When the stock breaks above this level I’ll look to go long, and to go short the same on a downtrend. It can be seen that the 50 EMA was a support and resistance point for the stock throughout the day. It acted as support several times in the morning session, but once it broke down through it the price tested the 50-day EMA now as resistance, before putting in a higher low and bouncing back.

This is a strategy I like to deploy on ultra-volatile stocks with huge volume. This is because without the volume and volatility the swings are not large enough to scalp, whereas we can see Synairgen offered several intraday opportunities. I also check Level 2 and the RSP to see what the market makers are offering, and when they’re no longer offering any stock for us to buy but are bidding in size – that’s a clue that the market makers want to take it higher. Remember, sometimes they’ll try and tree shake – but a tree shake here could easily be met with powerful demand and so end badly for any market maker. In volume spikes such as these, the market maker’s best chance of making money is by offering a competitive spread and winning the business.

2. Synairgen intraday chart

Stocks that offer such volume and volatility are stocks that I call ‘in play’. I find these stocks by scouring the RNS feed at 07:00, and by running my volume filter on SharePad. By finding the stocks in play it gives us traders a better chance of success, because at the end of the day – we are only as good as the stocks we choose to trade.

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