March Outlook For Menlo Therapeutics

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About: Menlo Therapeutics Inc. (MNLO)
by: The Freedonia Cooperative
Summary

MNLO is down 15% in the last week, likely as a correction from a strong February.

Despite weak quarterly financials, the company's serlopitant drug is progressing in an optimistic trial for skin treatment.

Signs from that trial will have a huge impact on price, as we've seen in the last four months.

In between updates on clinical trials, technical analysis on MNLO trading shows a bearish trend emerging.

Menlo Therapeutics (MNLO) is emerging from one of the wildest rides that any stock could ever have, after it plunged massively in October 2018 from its $12 highs. 2019 has opened on a very good note for this stock as the price has moved firmly upwards from its 2018 lows. Now that the stock is approaching some critical price levels, what is the outlook for MNLO for March 2019?

Fundamental Outlook

MNLO recently released its earnings report for the 4th quarter of 2018 as well as its full year results for the same year on February 27, 2019. In the same press conference, updates were given on the development of its treatment for pruritus. CEO Steve Basta indicated that the clinical trials were progressing well, with results being expected in 2020. The serlopitant drug has been given a stamp of Breakthrough Therapy. However, earnings numbers were disappointing, with the company citing an increase in the costs of administering its clinical trials, payroll costs and manufacturing expenses as the major reasons for the increased losses per share incurred.

The earnings numbers are apparently playing out in the market already, with not much buying activity being seen on the stock.

Technical Outlook

The weekly chart shown below shows an interesting price scenario for MNLO. There are 3 key price levels on the daily chart:

  1. The purple support line at the $7.28 price level, which is the lowest price that MNLO attained between March and September 2018.
  2. The green line marked R1, which is a resistance level that capped the price of MNLO at the $8.48 area between May and September 2018.
  3. Trading volumes are thin, which indicates that we may not see very sharp price moves.

Description: C:\Users\PC\Documents\Eric Grant\Stock_images\New folder\Mar2019_MNLO_wkly.png

MNLO Weekly Chart: December 7, 2018

Let us get down to the daily chart, which shows an interesting price evolution for the week just ended on March 8, 2019. We see the daily chart for MNLO on March 4, 2019 showing that price was a little bit below the key resistance level of $8.86. It was therefore expected that price would test this area and would either break it if buying volume was strong, or would be rejected at that area if the resistance held firm.

Description: C:\Users\PC\Documents\Eric Grant\Stock_images\New folder\Mar2019_MNLO_dly.png

MNLO Daily Chart: March 4, 2019

Of note is the $8.86 resistance, which was the resistance previously seen on the daily chart between June and September 2018, as well as the previous support of $7.36, seen within the same period as the previous resistance.

After trading for a few days, price was eventually rejected at the resistance line and fell all the way down to the support price level, closing at full offer on the support line of $7.36. Trading volumes are still low, as can be seen on the chart below.

Description: C:\Users\PC\Documents\Eric Grant\Stock_images\New folder\Mar2019_MNLO_dly2.png

MNLO Daily Chart: March 9, 2019

What is therefore the outlook for MNLO going forward?

Trade Scenario 1

Despite the low trading volumes, the daily candle of Friday, March 8, 2019 closed at the same price level as the low price, indicating full offer for the stock. Right now, the price is sitting at just 3 cents above the support line. Price is expected to make contact with the support area by the time the market opens on Monday, March 11, 2019. The price may push through the support level, either with a gap (considering the strength of selling on Friday), or it may test the support first before being sold off.

Watch to see if the Monday or Tuesday candle will close below the support line by at least a 3% penetration. Selling volumes must not necessarily be high for this to happen. If any of the daily candles for next week close below the support line, then the door will be opened for the price to push down towards the $5.50-$5.70 price level.

Trade Scenario 2

The 2nd scenario is for the price to bounce off the $7.36 support line, which opens the door for a renewed move to the $8.86 resistance. This move has to be accompanied by an increase in buying volume. If the resistance is attained and still holds firm, then we could be in for some weeks of range trading, with the resistance and support areas being the borders of such sideways movement.

Market Sentiment:

The long term and mid-term outlook of MNLO is:

  • Long Term – neutral
  • Mid-term – neutral to bearish

Please note: The price moves described on the weekly chart will take a few weeks to play out. Any entries should be made on shorter time frame charts such as the daily chart or the hourly chart.

Disclosure: I am/we are long MNLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.