As the stock of MannKind Corporation (NASDAQ:MNKD) tumbled Wednesday and Thursday, outpacing general stock market declines, while a Forbes report, citing a technical indicator, says it is oversold and might be time for a bounce back.

Mannkind

MannKind’s new wonder drug is a dud: Tourbillon

MannKind Corporation (NASDAQ:MNKD) had been the subject of short speculation from the hedge fund Tourbillon Capital Partners, first reported by CNBC July 25. Tourbillon had charged that Mannkind’s new wonder drug, considered a cause for the recent dramatic rise in the stock price, is really a dud due to health risks and pricing issues.

Mannkind was trading just above $6 per share in early may then it found the roller coaster. One month ago Mannkind had been trading near $11 per share, and yesterday it closed at $8.36, and this is the point at which the Forbes report says a technical indicator says it is oversold?  But is the technical indicator being correctly interpreted.

MannKind RSI vs general stock market RSI

The Forbes report exclusively considers the Relative Strength Index, the RSI, which measures buying and selling momentum on a scale from zero to 100 in an attempt to determine overbought and oversold conditions. Traditionally a stock is considered oversold if it falls below 30 on this scale.  The Forbes article notes the RSI touched 29.6 recently and then compared the RSI of MannKind to the RSI of the general stock market.

The way many professional technically driven traders use the RSI is slightly different than the use in the Forbes article.

RSI is not often used by itself but in conjunction with additional technical measures, including support and resistance, on balance volume, relevant moving average crosses, three month trailing volatility and much more – all dependent on the individual trader. Seldom is it used as a solitary trade trigger by professionals.

The RSI is generally not considered an “instant” indicator in that once a stock hits a particular level it is either a buy or a sell, either.  This is noted in the stock’s price rise earlier in the year when the RSI (at the top of the chart) indicated the stock was overbought and stayed at that level for several trading sessions.  The same is true with oversold conditions.

MannKind’s stock consolidation

The likely scenario from here in MannKind Corporation (NASDAQ:MNKD) is the stock takes a breather or heads lower, with a 65 percent chance the stock consolidates near long time support just above $8 before making another move in either direction. This notion is supported by a look at the trailing three month volatility.  If support near $8 is broken, look for a test of the consolidation gap near the $6 level.

In short, using the RSI to say a stock is oversold is like telling someone the Chicago Cubs have a shot at winning the World Series. Yes, it’s possible. It’s just not probable.

On a fundamental level, one the hedge fund is considering, Tourbillon thinks MannKind Corporation (NASDAQ:MNKD)’s lead diabetes treatment product, Afrezza, which recently won FDA approval, will fail due to potential customer backlash over safety concerns and higher prices than traditional insulin injection treatments.  “While Exubera has previewed what will happen with Afrezza, the market has had a way of ignoring this drug’s past failures until it actually launches,” an investor letter reviewed by CNBC said. “When and if this happens, we believe that MannKind will ultimately trade down 90% to a value around $500 million or $1/share.”  Tourbillon points out how a similar product, Pfizer Inc. (NYSE:PFE)’s Exubera, failed and then points out Afrezza could be even more likely to fail given harsh warnings on its labels, including one about the potential for lung cancer, the article noted. As well, Afrezza will be more expensive than standard insulin injections, a claim disputed by MannKind.