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WEDGE FORMATIONS


Are Drug Stocks Suffering From Hypertension?

01/03/02 01:42:37 PM
by Austin Passamonte

The long-term wedge formations that have developed in the pharmaceutical indices may very well be nearing an end. Look for a breakout to predict future moves.

Security:   DRG.X, PPH HOLDR
Position:   N/A

Long considered a safe haven for scared money during questionable times in the equity markets, one should expect the Drug Index to suffer mightily during the "guaranteed" economic recovery most market gurus assure us is ahead.

Does that make shorting drugs a lead-pipe lock? Why don't we see what their charts have to say?

Figure 1: Weekly Chart: DRG Index
Graphic provided by: Quote.com.
Graphic provided by: QCharts.
 
Since December 2000 we see where the DRG.X has coiled its way into a tightening wedge. Price action is currently suspended halfway in between resistance and support. Stochastic values have been in a bearish decline for the past three months and still counting. We can say there is little definitive action right now and the index could easily go either way.


Figure 2: Weekly Chart: PPH HOLDR

The pharmaceutical HOLDR gives us a bit more definitive picture: Similar type wedge, but much tighter. Stochastic values are still in a bearish decline as price action looks to form a bull flag formation during the past eleven weeks. The easy way to play this one would be on the inevitable break and close outside the pattern either way. Long shares or long call options on a pop higher may reach the $130 area while short shares or long put options may reach the $65 area eventually.

How do we arrive at that? Determine where we believe the consolidation wedge began, measure its widest span in price action distance and then project that value to the breakout either way. Seems like a lofty ascent or deep decline? Agreed, but more often than not we witness price objectives reached in weeks and months ahead, predicted ahead of time in precisely this manner.

Will the Drug Index suffer from depression or enjoy euphoria ahead? We can never tell either way, but developing scenarios and reacting to what we observe is indeed the essence of successful trading.



Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Company: CoiledMarkets.com
Address: PO Box 633
Naples, NY 14512
Website: coiledmarkets.com/blog
E-mail address: austinp44@yahoo.com

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Date: 01/03/02Rank: 4Comment: 
Date: 01/08/02Rank: Comment: how do you define stochastic cycless and what do they indicate
Date: 01/08/02Rank: Comment: how do you define stochastic cycless and what do they indicate
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Date: 01/19/02Rank: 5Comment: Know anything about PSSI?
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