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CHART ANALYSIS

Biotech HOLDRS Break Neckline Support

07/23/04 10:43:03 AM
by Arthur Hill

A top has been brewing in the Biotech HOLDRS (BBH) for months and the stock finally broke neckline support. Now what?

Security:   BBH
Position:   Sell

Led by Genentech (DNA), the Biotech HOLDRS (BBH) has been a top performer over the past two years as the stock moved from its July-02 low at 65.40 to its Apr-04 high at 160.25 (+144%). All good things must come to an end and the stock formed a massive distribution pattern in 2004. In addition to forming a head-and-shoulders distribution, the Accumulation Distribution (A/D) Line peaked well above of the April high and has been declining since Jan-04. This key indicator foreshadowed weakness and continues to forge new lows.


Figure 1: Daily chart for BBH with accumulation/distribution line.

With a neckline break on high volume (red arrows), the head-and-shoulders pattern has been confirmed and the downside target is to around 114 (160 - 137 = 23, 137 - 23 = 114). The distance from the top of the head to the neckline is subtracted from the neckline break for a target. Expanding volume on the actual support break and a break below the Sep-03 trendline further validates this bearish reversal pattern.

Figure 2: Daily chart for BBH with price channel.
Graphic provided by: MetaStock.
 
The neckline break dominates the technical landscape and points to lower prices, but beware of a bullish mutation from the right shoulder. The decline from late April to mid July retraced over 62% of the prior advance. This retracement is clearly more than usual, but an overshoot can be expected from such a volatile group and the stock remains with a fairly normal retracement. In addition, the pattern looks like falling price channel (magenta trendlines), which is also typical for corrections.

As long as the upper trendline holds, the bears are in full control. A move above the upper trendline would be positive and further strength above 147 (the late June high) would negate the neckline break and argue for further strength above the April high.


Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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