Friday, March 13, 2009

M&A chart pattern recognition

One reason I love being a market technician is because every stock chart has a unique story to tell. That story is reflected by the price movement along with the trading volume. Not only are fundamental events depicted in a chart pattern, but sometimes they can even be foreshadowed. Savvy traders have been known to make lots of money on these such occurrences. (This is especially true in the case of insider trading which may be invisible to the SEC but not to an experienced chartist. See comment below.*)

I ran across this following chart that, by ordinary standards, looks...well...odd. It's the daily chart of medical imaging IT company Emageon (EMAG), and the story this chart tells is one of on-again/off-again merger activity. (Click to enlarge image.)

You can see that on 10/14/08, the price pops because the company agrees to be acquired by Health Systems Solutions (HSSO) for $2.85 per share representing a $62 million deal. The stock trades in a very narrow range until December 22nd when Emageon says that HSSO is dragging its heels and wants it to close the deal. Investors smell blood and the stock gaps down, closing 41% lower than the previous day's close. The stock sinks further until the end of December when both companies agree to extend the closing date.

Things are looking good until the other shoe drops on February 11th when HSSO says that it can't get its financing together and terminates its offer. (Don't worry, Emageon received $9 million as a consolation prize.) Two weeks later another company involved in medical imaging, Amicas (AMCS), offers $1.82 per Emageon share in a $39 million deal. So far, this deal seems to be working. The stock has been trading very close to the offer price which means that investors are quite confident that this time the deal will go through.

*If you don't believe me, look at the one minute charts of stocks who have had major news announced during the trading session. Many times you'll see that the price and volume increase significantly before the time of the news release, sometimes as much as hours or even days ahead of it.

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