How Low Can Biotech Go?
05/08/2014 10:15 am EST
This former high-flying sector has come down to earth with a thud, and MoneyShow's Tom Aspray investigates whether the bottom is now in or if we can expect another wave of selling.
The stock market followed through to the downside, early Wednesday, raising the hopes of those on the short side. The turnaround caught many by surprise as the somewhat-optimistic economic outlook from Fed Chair Janet Yellen helped boost the market.
It still was a mixed close as the Nasdaq Composite (COMP) was down 0.32% while the Spyder Trust (SPY) that tracks the S&P 500, gained 0.59%. The Internet stocks continued to get hit hard, but in the broad market, there were twice as many advancing stocks as there were declining ones.
It has been a rough couple of months for the stock market as the wide trading range and sharp swings up and down have made it tough for both traders and investors. The earnings season has made it even worse as it has accentuated the volatility. There have been a number of stocks that beat earnings estimates but were still hit by selling.
Biotechnology has been one of the casualties as the Dow Jones Biotechnology Index (DJUSBT) was down over 20% at the mid-April lows. The question now is whether the sector has made its lows or if the biotech stocks are vulnerable to another wave of selling?
Chart Analysis: The Dow Jones Biotechnology Index (DJUSBT) closed on Friday, February 14, very near to its weekly starc+ band. The Index made a new high at 1597 the following week and then closed lower.
- In just seven weeks, the starc- band was being tested and the following week it hit a low of 1270.
- DJUSBT closed the week higher and has been rebounding ever since as the 20-week EMA is now being tested.
- The daily starc- band is at 1574, which also corresponds to the 61.8% retracement resistance. A close above this level would be positive.
- The weekly relative performance did confirm the February highs before dropping below its WMA.
- There is next strong support at line b.
- The RS line signaled in early 2012 that biotech was a market-leading sector.
- The weekly OBV has turned up from its long-term uptrend, line c, and could close back above its WMA this week.
- The daily technical studies (not shown) are positive.
- The weekly starc- band is at 1207 with the major 38.2% Fibonacci retracement support from the August 2011 low at 1172.
- This is just above the long-term uptrend, line a, which is now at 1132.
The iShares Nasdaq Biotechnology (IBB) has an over 8% holding in Gilead Sciences (GILD), Celgene Corp. (CELG), and Amgen Inc. (AMGN). The top ten holdings make up 57% of the ETF with 43% in the other 112 holdings.
- IBB had a low of $207.48 on April 15, which was just above the minor 61.8% support from the June 2013 low.
- Additional support (line e) connects the August and October 2013 lows and is in the 208 area.
- The daily relative performance is trying to stabilize but has not yet completed a bottom formation.
- The daily OBV broke its major support, line g, on March 7 (see arrow) and did make a new low with prices.
- The OBV is still below its declining WMA and is now testing support at line h.
- There is short-term resistance at $236 and a move above this level would improve the technical outlook.
- The quarterly pivot is at $244.70 with the February 25 high at $275.40.
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- The April low was $272.02 with the quarterly S1 and chart support at $264.70, line a.
- There is further support in the $246-$250 area, line b, and the weekly starc- band.
- The weekly relative performance is trying to hold support at line d as it did confirm the price highs.
- There is additional support for the relative performance at line c.
- The weekly OBV has reversed sharply from its all-time high as it dropped below its WMA on March 21.
- The further OBV support (line e) has now also been broken.
- The daily OBV and RS analyses are both currently negative.
- The rebound high and quarterly pivot are at $311.79 with the 61.8% retracement resistance at $325.70.
Celgene Corp. (CELG) peaked ahead of many of the other biotech stocks as it hit $174.66 in January and two weeks later reached its starc- band.
- Over the past month, CELG has been trying to stabilize after reaching a low of $133.70.
- This was a decline of 23.4% from its high.
- The weekly uptrend, line f, is in the $160 area along with the starc- band.
- The additional support at line g, was derived from the 2007-2008 highs and now stands at $97.60.
- The relative performance did not make a new high with prices (blue line) and is now just above long-term support at line h.
- The weekly on-balance volume (OBV) also formed a negative divergence at the early 2014 highs, line i.
- This divergence was confirmed by the break of support, line j, in early March (see arrow).
- The 20-week EMA is now being tested with the monthly projected pivot resistance at $153.23
What It Means: The daily and weekly analysis of both the iShares Nasdaq Biotechnology (IBB), the NYSE Arca Biotechnology Index Fund (FBT) and several large biotech stocks does favor another wave of selling before a bottom would be completed.
It would take a further rally from current levels to suggest that a bottom was already in place.
How to Profit: No New recommendation