PPH And The Three Bears

10/06/04 01:56:09 PM

by Arthur Hill

Three bearish patterns point to further weakness in the Pharmaceutical HOLDRs (PPH).

Security: PPH
Position: Sell

Three bearish patterns point to further weakness in the Pharmaceutical HOLDRs (PPH). The first two patterns have already been confirmed as bearish with key breaks and the third pattern is on the verge of confirmation.

First, the Pharmaceutical HOLDRs (PPH) formed a large and bearish rising wedge from July 2002 to August 2003. The rising wedge advance also retraced 50% of the prior decline. Both the pattern and the retracement are typical for bear market rallies. The lower trendline break signals a continuation lower and projects a move below the July 2002 low (58.70).

Figure 1: Pharmaceutical HOLDRs PPH-Weekly

Graphic provided by: MetaStock.

After the rising wedge trendline break, PPH recovered and rallied back to the mid-80s. The lower trendline extension of the rising wedge went from support to resistance as the stock peaked just below 85 (red arrow). With a decline back to 75, a large triangle evolved (magenta trendlines) and the stock broke below the lower trendline in July 2004 (black arrow). This is the second major bearish signal.

The third and final pattern is a large head-and-shoulders pattern that extends from August 2003 to October 2004. It is hard to say if this marks a continuation of the rising wedge break or a reversal of the advance to the mid-80s. In any case, the pattern is clear and a move below neckline support would signal further weakness below 60.

All three patterns point to further weakness and it would take a move above the September high (right shoulder) to negate the head-and-shoulders. As long as this high remains unchallenged, the odds favor a neckline break and further downside.

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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