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OVERBOUGHT OVERSOLD


Biotech Balancing Act

09/23/03 09:30:11 AM
by David Penn

Biotechnology stocks have moved up since an anticipated breakdown a month ago.

Security:   BBH, GILD, CHIR
Position:   N/A

Back in early August, a series of peaks in the biotechnology HOLDRs, led me to suspect that BBH was due for a correction ("Biotech Breakdowns Dead Ahead," Traders.com Advantage, August 8, 2003). BBH had fallen below its 20-day moving average late in July, and moved beneath its 50-day moving average early in August. With a test of its multi-month upward trendline looming and its 200-day moving average some twenty points below, it seemed as if the likelihood of a correction was growing for biotechnology stocks.

In the six weeks sInse, the BBH has remained resilient and has not moved below the August pivot low point I noted. In fact, by mid-September, the BBH had notched a new high for the current bull advance that began back in March 2003. However, beneath this strength, it appears that a number of component stocks continue to struggle to remain above their 50-day moving averages.

Figure 1: The BBH uptrend in September challenges the negative divergence shown in the MACD over the summer.
Graphic provided by: TradeStation.
 
What are some of the more vulnerable components of the BBH? Four of the nineteen stocks in the BBH (ENZN, GILD, MEDI, SHPGY) have already fallen below their 50-day moving averages. While ENZN has been in a downtrend anyway over the past few months (and remains below its 200-day moving average), stocks like GILD had been in solid uptrends up until mid-September when it gapped below both its 20- and 50-day moving averages.


Figure 2: Gilead Sciences developed an island top during the second half of the summer of 2003.

Chiron Corporation (CHIR) is one of the biotech HOLDRs components that remains above its 50-day average. In fact, CHIR is not only trading above its 50-day moving average, but has remained above its 20-day moving average. However, CHIR has experienced declining volume ever since gapping up at the beginning of September. While this is normal (if not positive) behavior for stocks in consolidations, the overbought MACD and near-term, price weakness CHIR has shown suggests that it may be vulnerable to correction if it is unable to find support at the 20-day moving average.


Figure 3: A gap down in this overbought market for CHIR suggests a pullback may be in store.

Again, it is worth noting that most of the components of the BBH have remained above their 50-day moving averages, which likely makes them still "safe" from an investment point of view for those who own them. Moreover, most of these stocks remain above their 20-day moving averages, as well. Nevertheless, the number of these component stocks reflecting overbought markets, or negative divergences with indicators such as the MACD, is such that biotechnology looks like a sector that is better "distributed" than "accumulated" -- at least in this near-term view.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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