This column was originally published on RealMoney on Sept. 18 at 12:00 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Big-cap biotech stocks jumped last week after Merrill Lynch added
to its elite Focus 1 list.
However, the sector continues to lag the broad market in the current recovery.
Does last week's uptick mark the start of a large-scale rally, or will gravity set in and take control of these speculative issues?
It's important whether these stocks find buyers in the weeks ahead because of the outsized influence this sector wields on the Nasdaq 100.
Six biotechs are among the top 30 components by capitalization.
This muscle could weigh down the index as it attempts to recover from a very bad summer.
is a special case in two ways: It makes generic drugs after the original manufacturers lose exclusive rights to them, and it's located in Israel, at the center of world tensions this summer.
These are unique circumstances, so I'll review the stock another time.
There's also little point in examining
now. The sad truth is, neither chart shows interesting price action, up or down. My best advice is to avoid both stocks until they prove their worth. That might take another six to 12 months.
Genentech is the $83 billon giant that moves the biotech sector -- it floated the entire group during a strong rally that ended last year. The stock then dropped into a broad trading range, with support in the mid-$70s and resistance in the mid-$80s. This sideways pattern has been in place for the last six months.
Note the minor impact of Merrill's Sept. 14 announcement. The real news was the company's announcement Monday of delays for its Avastin cancer drug. That triggered a high-volume breakdown from a trend line within the broad trading range. Despite the late-week surge, it looks like it is headed back to $75.
I was too positive in
July on Genentech, so I'll avoid being too negative here. Let's assume for now the stock will hold key support on this downturn; however, that won't mark a good buying opportunity by any means. There's really no choice but to wait until this persistent range breaks to the upside or downside. That might take the rest of this year.
had a stronger week, leaping off a six-week bull flag after the Merrill news. This is perfect positioning for a continued rally above the summer high at $70.31. However, it's hard to tell how much progress it will be able to make through the remainder of the year.
Note how it has already retraced 62% of its November-to-May downtrend. This suggests slow going between $70 and $75. The highs from the prior downtrend will contribute to selling pressure, but the grind higher should continue into mid-October, when third-quarter earnings are released. A quick test of the 2005 highs could unfold if that report contains no nasty surprises.
Now for the two blue-chip biotechs with the most interesting bull patterns for the fourth quarter. These issues have been on my watch lists for years, offering a series of profitable trades as they've grown into leadership. If the sector is destined to wake up in the coming months, these are the stocks that will take it higher.
is headed to a test of its all-time high of $66.20 from May. Common sense dictates that short-sellers will take the stock down once it gets there, hoping to see a double-top reversal. However, I think it can hold above its 50-day moving average support near $62 despite their efforts and set up a strong breakout.
Is there any advantage to buying now and hanging on through the expected headwinds? That really depends on your intended holding period. Longer-term investors can average in here and get advantageous pricing for the fourth quarter. However, speculators should remain on the sidelines until sellers between $65 and $67 take the price back down to support.
rallied to an all-time high of $49.41 in July and sold off. It broke breakout support at $45 a few weeks later and is now testing its 200-day moving average. I believe this test will be successful and set up a rally back to the summer highs. However, patience will be required to get the best entry price.
We don't know if the bull hammer printed last week marked the low for this correction, but we do know that a rally above $45 will reinstate the breakout signal that was violated on the downturn. The best advice is to avoid bottom-fishing and wait until that bullish "failure of a failure" setup unfolds. That might take another two to four weeks.
At the time of publication, Farley held none of the stocks mentioned, although holdings can change at any time.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
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