MorningWord 9/22/15: BioShock – $XBI

by Dan September 22, 2015 9:30 am • Commentary

When market participants lack confidence in the underpinnings of the investment environment they quickly turn to technical analysis as their main trading input (there are some traditionalists with a long timer horizon that still view technicals as a sort of blood magic). I for one have always relied on technicals, in good times and in bad, as well as breadth and momentum indicators to aid in entry and exit points. The reason is simple, everyone else is looking at the same stuff. And when volatility increases the attention to technicals also increases as the time it takes for technicals to play out goes from weeks or months to days or even hours.

Let’s look at biotech stocks. They got creamed yesterday, with the XBI (S&P Biotech etf) down 5.4% on the day (but still up 21% on the year).  The year to date chart below shows how yesterday the stock stopped on a dime, and found support at its 200 day moving average (yellow line).  For those trained in the dark arts of technical analysis, if you were looking at yesterday’s price action, it would make sense then that buyers, either those looking at long entries, or those covering shorts, all lined up at the stock’s 200 day moving average:

XBI 1yr chart from Bloomberg
XBI 1yr chart from Bloomberg

So the stock found some near term support, where it should have.  But the obvious question is what comes next on the downside?  In February the etf broke out to a new all time high above $69, and on three occasions since has found support at that level.   A break of  the 200 day likely puts $69 in play very quickly and then you have that range of Aug 24th to contend with:

XBI ytd chart from Bloomberg
XBI ytd chart from Bloomberg

As long as we are looking at the space, let’s take a quick look at the technical health of some of the behemoths in the space.

First the mac-daddy, Gilead (GILD) sporting a $155 billion market cap which is still up 12% on the year appears to be at a fairly critical spot, below the uptrend that had been in place from its March 2014 lows, and approaching what has been important support at $100:

GILD 2yr chart from Bloomberg
GILD 2yr chart from Bloomberg

And then Amgen (AMGN) with a $111 billion market cap, which is down 8% on the year, which has also broken its uptrend that has been in place since March 2014, and now below key support at $150:

AMGN 2yr chart from Bloomberg
AMGN 2yr chart from Bloomberg

Celgene (CELG) with a $95 billion market cap, up 6.5% on the year is probably the most constructive of the large caps biotechs, holding its uptrend, well above support at $110:

CELG 2 yr chart from Bloomberg
CELG 2 yr chart from Bloomberg

And lastly Abbvie (ABBV), with a $98 billion market cap, down 9% on the year.  This one is quite interesting, a massive double top just above $70, a recent break below the 3 year uptrend, with obvious support at $55:

ABBV 3yr chart from Bloomberg
ABBV 3yr chart from Bloomberg

Biotech stocks have been a massive bull market leader, with gains fueled by investor appetite for growth in a low rate environment, with corporates looking to manufacture growth by using cheap money to make expensive acquisitions and buy back their own stock.   Weakening momentum in this space is something we are keeping a close eye on and could be the canary in the coalmine for whether the current correction U.S. equities is just that, or turns into something much worse.  Of course mundane things like fundamentals are important over the long haul, but the charts are here to help on entry and exit levels in trading the current volatile market.