Biotechs have been outperforming the broad market since the major indices turned lower in May. Cash flows into this speculative group make sense, because many investors are searching frantically for decent annual returns. Will the recovery effort have legs or fizzle out like prior attempts to jump-start this formerly dead sector?

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On Monday, I

reviewed sector exchange-traded funds, noting recent technical improvements driven by renewed interest in big-cap components like


( DNA) and


(AMGN) - Get Report

. However, I also cautioned that progress had been incremental so far and that these issues needed another round of committed buyers before moving higher.

Today, let's extend our view toward smaller and riskier members of the biotech community. These are the startup and research firms that show great promise but weak revenue. It's an interesting subset less affected by broad selling pressure; that is a good thing when lunatics are running the market asylum, like they are this July.

Just keep in mind these issues can move violently after key research announcements or FDA rulings. After all, many of these firms are one-trick ponies that have just a few promising drugs in their pipeline. They can easily lose 80% of their value overnight if research doesn't pan out, or if a competitor releases a better drug.

Finally, note that my review approaches these speculative issues from a purely technical standpoint. Readers looking for deeper data on the fundamentals driving these companies need to check out


resident biotech expert,

Adam Feuerstein, and find out everything you ever wanted to know about these stocks and this unique industry.

Idera Pharmaceuticals

(IDRA) - Get Report

develops genetic compounds used in the treatment of a variety of diseases. The stock fell to a multiyear low in 2006 and started to move higher in a steady uptrend that's still in place. It rallied to an eight-year high in early June and dropped into a rectangle pattern, with support near $13.

The stock's addition to the Russell 2000 index triggered the huge June 27 buying spike. Idera has held up well since that bullish event, with price surging off support last week, while the major indices were going through credit-driven convulsions. The relative-strength action points to the likelihood of a notable breakout.

Emergent Biosolutions

(EBS) - Get Report

creates immunobiotics for military and civilian applications. Its work on bioterrorism makes it a notable defense play, in addition to the biotech connection. The stock rallied out of a yearlong downtrend in January and has nearly tripled in price since that time.

The stock is currently engaged in litigation with Protein Sciences regarding an asset sale. That could muddy the waters for some time, because of the financial uncertainties. However, the strong uptrend should remain in place and set the stage for a rally back to the stock's all-time high near $18, posted in January 2007.

Osiris Therapeutics

(OSIR) - Get Report

conducts stem-cell research for a variety of clinical applications. The stock fell out of bed in early 2007, plummeting from $29 to $11 in less than two weeks. It moved sideways in a bowl pattern for the next year before perking up considerably in the last few months.

The stem-cell subsector is getting a renewed bid from the upcoming presidential changing of the guard. This stock has now rallied up to base resistance near $15, while accumulation is building nicely. This predicts it will finally break out and head higher. The initial target after the uptrend gets under way lies at $22.30, the early 2007 swing high.

Halozyme Therapeutics

(HALO) - Get Report

specializes in dermatological products. This was a hot rocket in 2007, rising from $2 to $10 during the first half of that year. It then entered a steady decline that retraced 75% of its rally gains before bottoming out in March. The subsequent bounce lifted the stock back to $7, where it began another pullback.

The recent follow-through rally confirms the emerging uptrend. However, price is now running into stiff resistance between $8 and $8.50. This barrier should slow progress considerably. The prognosis is positive, with an eventual test at the 2007 high, but price action into that key level will be erratic, unlike last year's momentum spike.

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

At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider IDRA, EBS and OSIR to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Farley is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in





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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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