Monthly Analysis of Big Biotech

10/01/2014 10:00 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

The sharp drop in the biotech stocks last spring caught many by surprise and MoneyShow’s Tom Aspray’s monthly analysis of three biotech giants can help investors understand what to expect in the last quarter of the year.

The failure of the stock market to follow through to the upside after Monday’s recovery from the sharply lower opening is a short-term negative. The market internals were clearly negative Tuesday as the McClellan oscillator closed at -175. It is still above last Thursday’s low at -244.

Plunging oil prices hit the energy stocks hard as the Sector Select SPDR Energy (XLE) closed down 1.25% and it has dropped over 10% from the June highs. Traders are watching the short-term support in the Spyder Trust (SPY) at $196.05 and the resistance at $198.50. A close outside of this range should trigger another 1+% move.

The end of the month and quarter allows one to analyze the new pivot levels which have helped keep traders and investors on the right side of the market all year. The iShares Nasdaq Biotechnology (IBB) has been a market leader all year as it is up 20.72% YTD, which is much better than the 8.16% YTD  gain in the Spyder Trust (SPY).

The monthly analysis of IBB as well as three of the largest cap biotech stocks can help one determine how they may do in the last quarter of the year.

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Chart Analysis: In August, the iShares Nasdaq Biotechnology (IBB) had a monthly close above the resistance at line a.

  • The 127.2% Fibonacci retracement target from IBB’s spring decline has upside targets at $292.30.
  • The monthly starc+ band is at $296.80 with the quarterly projected pivot resistance at $303.06.
  • The 4th quarter pivot is at $265.35 with the 20-month EMA at $219.
  • The monthly relative performance  bottomed in April before turning higher.
  • The RS line has support at line c, and its rising WMA.
  • The weekly RS line (not shown) shows a pattern of higher highs and is well above its rising WMA.
  • The monthly OBV peaked in February and dropped below its WMA in March.
  • The OBV is now testing the longer-term uptrend, line d.
  • The weekly OBV is holding well above its WMA but has not confirmed the new highs.
  • IBB has been in a $17 trading range for the past month and a close above $280 would be bullish.

Gilead Sciences, Inc. (GILD) is up 41.74% YTD and has closed the past two months above its starc+ band. The weekly starc+ band was also tested at the end of August.

  • There is short-term resistance now in the $110.70 area with October’s projected pivot resistance at $127.46.
  • The 20-day EMA is at $105.71 with the quarterly pivot at $100.14.
  • The September low for GILD was $97.54.
  • The monthly RS line did make a new high last month.
  • It is well above its rising WMA and the uptrend, line f.
  • The monthly on-balance volume (OBV) peaked in August but has now turned lower.
  • It is well above its rising WMA and the weekly OBV (not shown) did confirm the recent highs.
  • The daily technical studies are now slightly negative.

Next Page: Two More Stocks to Watch

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Amgen, Inc. (AMGN) also reached its monthly starc+ band last month, which is now at $145.55. AMGN is currently up 24.73% YTD and had a 27.55% gain in 2013 according to Morningstar.

  • AMGN did form a doji in September so an October close below $135.63 would trigger a monthly LCD sell signal.
  • The quarterly pivot is at $133.10 with further support from the March high in the $129 area.
  • The weekly uptrend and the rising 20-month EMA are in the $114-$114.50 area.
  • The monthly RS line broke through long-term resistance, line b, in July.
  • The monthly OBV did make a new high last month and has been above its WMA since June 2008.
  • The weekly OBV (not shown) did confirm the recent highs as AMGN came very close to its starc+ band.
  • On a move above $144.46, the monthly projected pivot resistance is at $149.01.

Regeneron Pharmaceuticals (REGN) closed near the highs last month and is up 30.98% YTD.

  • There is short-term resistance now at $365.33 with October’s monthly projected pivot resistance at $385.66.
  • There is monthly chart resistance, line e, and the starc+ band are now in the $398-$400 area.
  • The quarterly pivot is at $354.80 with the projected pivot support at $344.17.
  • There is major monthly support, line f, in the $276.60 area.
  • The monthly relative performance broke out to the upside two months ago (see arrow).
  • The RS line has good support at its WMA and line g.
  • The monthly OBV moved back above its WMA in July and is very close to its all time high.
  • There is good support at the WMA and the uptrend, line h.
  • The weekly RS and OBV analysis are both positive, which confirms the price action.

What it Means: The fact that both Gilead Sciences, Inc. (GILD) and Amgen, Inc. (AMGN) closed near their monthly starc+ bands means that they are at high risk levels but does not mean they cannot still move higher. The risk is high on new positions at current levels.

Both iShares Nasdaq Biotechnology (IBB) and Regeneron Pharmaceuticals (REGN) are at lower risk levels basis the monthly starc band analysis. The daily studies suggest further weakness for IBB while daily analysis is positive for REGN.

All three of the large biotech stocks are top five holdings of IBB.

How to Profit: For Regeneron Pharmaceuticals (REGN) go 50% long at $357.55 or better and 50% at $355.15 with a stop at $338.39 (risk of approx. 5%).

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