NEW YORK (TheStreet) -- It's time to get out of biotech stocks, because the sector is headed for big declines.
Biotech stocks are slumping this week following a tweet about "price gouging" in the sector by Democratic presidential candidate Hillary Clinton. The iShares NASDAQ Biotechnology Index (IBB) - Get Report , an exchange-traded fund that tracks the sector, is trading at $330.82 early Tuesday afternoon, down more than 7% from Friday's close.
The kiss of death for Gilead and other companies tracked by the iShares NASDAQ Biotechnology Index was the massive bearish divergence sell signal (shown below by the bold, blue lines that highlight the higher highs in price vs. lower highs in stochastics since late 2014) in the ETF that was triggered in July.
With plenty of room for these stochastics to fall before becoming oversold (a condition they haven't seen since 2009), the colored boxes in this monthly bar chart create a map of the price behavior that the decision support engine currently ranks as the highest-probability outcome.
On the short to intermediate time frames, the pink box on the left defines the initial decline off the all-time high. If the next decline matches the intensity of the first (a common Elliott Wave and Fibonacci symmetry), the pink box on the right should define the the path in the coming few months of iShares NASDAQ Biotechnology Index: a test of $250 +/-$15.
The ETF likely will probe the red box if a liquidity vacuum arrives that is similar to the one in late August. The lower end of the red box would test the extreme low of the early 2014 decline, which should contain the next few months of selling if the decision support engine becomes oversold by then and issues warnings to cease selling actions and begin buying actions. Otherwise, the bright green box that surrounds $195 +/-$15, will likely be needed to halt, at least temporarily, the slide.
As the Fibonacci retracement lines show, $220 +/-$40 is the highest value target zone of the coming decline. This downward projection will remain undeniable unless $388 is broken -- a distant alternate outcome that has little statistical significance at this point. From Monday's close around $340, probing the middle of this downside forecast lines up as a 35% smash. If the lower extremes are tested, the slide would approach a 47% crash!
Therefore, regardless of what Hillary Clinton says, this sector has been morphing, over the past few months, from hero status to what has a good chance of becoming zero status. You should exit the sector. If you're long and are savoring your rescue from the abyss in late August, you should place protective sell stops at $331. If you're flat, the decision support engine is more assertive, suggesting a break of $340 as the place to establish short exposure. And if you're already short, maintaining your current exposure while using any further strength into $347 to add to your position. You could also use a break of $325 to add to it.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.