Lessons from Dendreon DNDN

May 5, 2009: 5:36 PM CST

A few readers have emailed me to ask what happened last week in Dendreon’s (DNDN) unusual price action on Tuesday, April 28.  I wanted to share the chart and some links to other news stories that try to explain what happened and what we can learn from it.

Dendreon tripled in value on April 14th as the company announced positive research results for its Cancer treatment drug Provenge.  Investors with strong stomachs and risk-appetites often enjoy trading or investing in biotechnology companies that could ‘hit the big one’ and sometimes they are rewarded for their risks – other times they are not.

I wanted to focus on Tuesday, April 28th’s action and provide some links for what happened and also highlight the risks due to volatility that investors face when trading biotechnology companies.  Newer investors are often drawn to these types of moves, but unfortunately, more times than not, the ‘little guy’ winds up hurt or with large losses as a result.

Here are some articles that describe what happened and what can be learned.

First, the Motley Fool financial site posts “Two Lessons from Dendreon.”  In it, Brian Orelli writes:

“Turns out there was some weird trading of Dendreon’s shares yesterday afternoon; this was right before trading on the stock was stopped ahead of presentation of the data for the company’s prostate fighter, Provenge, at the American Urological Association’s annual meeting.  The data looked good. Really good. But the stock was trading down 45% right before trading was stopped for the data presentation.”

He also addresses the question of whether or not you should use hard (in the market) stops on volatile companies, hinting that you shouldn’t, but should certainly use them on more stable (less volatile) companies – in other words, make the distinction before using stops.  Volatile stocks can have sudden moves like this where hard stops are taken out, leaving the ‘little guy’ in the dust again.

Elizabeth Trotta of the Street.com wrote a summary entitled “Dendreon Plunges, Trades Will Stand” in which she explains what might have happened and what the NASDAQ wrote about it.  Although it may have been a brokerage firm’s error prior to the release of results from a drug test, those shares transacted (and stop-losses hit) will stand.

Elizabeth quotes an anonymous trader: “At about 1:25 the stock starting really tanking. People thought the news was out. Obviously the news wasn’t out yet, and then they halted the stock,” said one trader, who didn’t want to be named, but who bought the shares during the decline. “My guess is that someone sold because they thought they saw something or did see something, and that might have caused the cascade of selling. But there’s no way of knowing.”

Finally, back to the Motley Fool.com where Brian Orelli writes a humorous post on April 8th, well-in advance of the Dendreon fiasco entitled:  “I’m Rich!  I’m Ruined!  Overreaction Equals Opportunity” which speaks positively of moments like these.

Personally, I’m stylistically a more conservative trader, and thus am content avoiding these opportunities that so many others are drawn to trade.  I prefer steady, incremental gains rather than trying to hit a big win, though more than not come up short (sometimes with larger losses than expected).

I’m not suggesting you avoid volatile stocks, but do carefully consider the risks and stick to what you know if you are a newer trader.  To have a long-life as a trader, it might mean sacrificing opportunities for quick profits if the flipside of a wrong bet means the possibility of a staggering loss that will take numerous winning trades to overcome.

Corey Rosenbloom, CMT
Afraid to Trade.com

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9 Comments

9 Responses to “Lessons from Dendreon DNDN”

  1. gamingthemarket Says:

    Any chart that looks like that is a big red flag for manipulation. DNDN has a long history of naked short selling attacks.

    “It turns out that the collapse of DNDN from over $20 to that $5 price was accompanied by massive levels of naked shorting. At one point, 18 million shares were unsettled (about 20% of the ownership of the company). It cannot be repeated too often: That is just the data coming from one crack in the system, the CNS bucket at the DTCC, and does not include any fails accumulating at the brokerages, or diverted by pre-netting, or masked by the Stock Borrow Program, or swept into the ex-clearing system, or stemming from offshore failures. So it is the tip of the iceberg (and perhaps, the tip of the tip of the iceberg).”

    http://www.deepcapture.com/dendreons-cancer-res

  2. Corey Rosenbloom, CMT Says:

    True, the official report was that it was an “error.”

    Tip of the Tip of the iceberg! Nice.

    I didn't realize naked shorting was still allowed, but stranger thinks have happened of course.

    Thank you for sharing!

  3. Neil Says:

    hi Corey ….though this comment aint related to this post … but anyways, any opinion about where the major indices are heading, it all seems as if S&P 500 is all set to test the 200 day sma.

  4. Neil Says:

    Hi corey,

    though this comment aint relatd to this post, but anyways …. any opinion views on where the major indices are heading, seems SP 500 is all set to test the 200 day sma .

  5. gamingthemarket Says:

    Naked shorting has always been illegal, just like tax evasion. Therefore hedge funds (80% of them) and U.S. corporations register in the Cayman Islands. This helps them avoid U.S. regulations and taxes.

    “A five-story office building on South Church Street in the Caymans serves as the official address for 18,857 corporations… About half those Cayman companies had billing addresses in the U.S., according to a 2008 GAO study.”

    Coca-Cola, Oracle, Intel Use Cayman Islands to Avoid U.S. Taxes
    http://www.bloomberg.com/apps/news?pid=20601109

  6. gamingthemarket Says:

    Naked shorting has always been illegal, just like tax evasion. Therefore hedge funds (80% of them) and U.S. corporations register in the Cayman Islands. This helps them avoid U.S. regulations and taxes.

    “A five-story office building on South Church Street in the Caymans serves as the official address for 18,857 corporations… About half those Cayman companies had billing addresses in the U.S., according to a 2008 GAO study.”

    Coca-Cola, Oracle, Intel Use Cayman Islands to Avoid U.S. Taxes
    http://www.bloomberg.com/apps/news?pid=20601109

  7. avarauto Says:

    DNDN is as over priced and rated as anything I've seen, They are only making 2000 units this year. That is nothing. 2.5 months more when you are dying anyway, may not be very enjoyable for most. Sanofi already has a product on the market for this. Merck is on the hunt too. How is this one trick pony going run. If they can make it better, one or 2 years, it would be different.

  8. avarauto Says:

    The long side of DNDN is a bunch of folks trying to put lipstick on a pig. oink, oink. You will see 25 before 55.

  9. avarauto Says:

    The long side of DNDN is a bunch of folks trying to put lipstick on a pig. oink, oink. You will see 25 before 55.