Pharma Index Shows Relative Strength

07/25/08 01:42:17 PM

by Arthur Hill

While the market recently bounces off multimonth lows, the Amex Pharmaceutical Index is challenging resistance and showing relative strength.

Security: $DRG
Position: Accumulate

Figure 1 shows the Amex Pharmaceutical Index ($DRG) in 2008. The index declined sharply from early January to early March and then traded sideways for five months. There was a brief dip to new lows in June, but the index rebounded with a sharp advance in July. This move carried the index above the 50-day moving average and the index hit resistance around 310. A break above the early July high and the 200-day moving average would be bullish.

FIGURE 1: DRG-X, DAILY. The Amex Pharma Index declined sharply from early January to early March and then traded sideways for five months.

Graphic provided by: TeleChart2007.

The index shows incredible relative strength over the last five weeks. The price relative is displayed in the bottom indicator window. This shows the ratio of the Amex Pharmaceutical Index ($DRG) to the Standard & Poor's 500 ETF (SPY). The ratio rises when DRG outperforms and falls when DRG underperforms. With a sharp rise, the index is suddenly outperforming the market. Fund managers keep an eye on sectors showing relative strength. This is especially important when the broader market remains weak.

FIGURE 2: DRG-X, DAILY. A closer look at the chart reveals a bullish flag over the last few weeks.

Graphic provided by: TeleChart2007.

A magnification of the chart and focus on recent price action reveals a bullish flag over the last few weeks (Figure 2). The index surged to resistance and then consolidated with a flat trading range. This consolidation represents a rest after the surge and a break above 308 would signal a continuation higher. A breakout at 308 would project a move to around 326. The flag is said to fly at half-mast. A move above flag resistance would project a move equal to the flag pole (red dotted line).

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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