Short the Biotechs and Ag Stocks

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Biotechs ran into a brick wall when the Obama administration tackled health care reform in February. However, the sector's misfortune began even earlier, when these issues failed to take advantage of a leadership role after the 2008 crash. Fresh January capital had offered a perfect opportunity to lift the sector, which held up well in the fourth quarter.

SPDR Biotech ETF (XBI) -- Daily eSignal

Biotechs ground sideways through January, making no headway, and then plunged after the government news. They bounced with the market in March but have underperformed badly in the last seven weeks. Selling pressure has increased considerably since the start of April, with the SPDR Biotech (XBI Quote) ETF now testing its 2009 low.

Note how the March low aligns with November's bear-market low. This is bad news, because the most recent downswing has completed an inverse cup-and-handle breakdown pattern. A major sell signal will trigger on a decline through support at $43. The ensuing downtrend should drop price though the fund's historic low at $41.77 and into the $30s.

Big-cap biotechs show the most promising short-sale patterns. On the other hand, it's best to avoid sector small caps because bullish stories like Dendreon's (DNDN Quote) will still attract aggressive speculators. With this caution in mind, the top short prospects at this time are Amgen (AMGN Quote), Cephalon (CEPH Quote) and Genzyme (GENZ Quote).

Genzyme (GENZ) -- Daily eSignal

Genzyme is an especially interesting short play because the selloff into March broke 2006 support at $54.64. The seven-week recovery lifted price over that key level, but the uptick stalled well under the 50-day moving average at the end of March, with the stock rolling over and testing that level once again.

Frankly, there's no reason this issue should stop falling right here. The technicals show heavy distribution, which points to funds and institutions dumping positions as quickly as they can. This lack of sponsorship could set up a major gravity wave that carries price through the 2009 low and down to 2004 support in the low $40s.

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Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.