At last weekend's TheStreet.com investment conference, I pointed to biotech as one group to watch for a strong recovery in early 2009. I was pleasantly surprised when other contributors also mentioned the sector as a potential winner after the market stabilizes. I guess great minds think alike (subscription required), or at least we're all adrift in the same leaky boat.

Let's examine the current evidence and see if a 2009 biotech recovery is really plausible, despite the worst market downturn in decades. If this speculative group is destined to make a comeback next year, logic dictates the slow turn toward higher prices should happen well in advance of the calendar turn, perhaps as early as mid- to late November.

First, let's agree Genentech ( DNA) muddies the 2009 outlook, because Roche's contested acquisition distorts the sector indices and exchange-traded funds. In better times, we'd look at this proposed takeover as a positive sign, but no one truly believes the merger will herald a wave of similar activity, given the adverse credit environment.

And, although small-cap biotechs are my favorite trades in good markets, I don't expect this segment to lead a recovery next year. It's under massive distribution, with the broad iShares Nasdaq Biotechnology Index ( IBB) ETF sitting at a five-year low. For this reason I believe that biotech's fate rests squarely in the hands of its biggest-cap components.


SPDR Biotech Trust (XBI)
Click here for larger image.
Source: eSignal

The big-cap-weighted SPDR Biotech Trust ( XBI) rallied to an all-time high in August before selling off with the broad market. The decline fully unraveled the 2008 uptrend, dropping price back to the March low. The fund has been hovering near that level since Oct. 10, grinding through the same pattern we're seeing in the major indices.

The selloff brought price down to a rising trend line in place since May 2006. For now at least, the fund is holding that support level, as well as support from the big lows posted earlier this month and in January. However, it's clear that the components of this ETF are vulnerable to the same redemption storm we're seeing throughout the equity universe.

The convergence of price patterns between this fund and the major indices in recent weeks tells us they're now moving in tight lock step, which is unfortunate. The alignment makes it nearly impossible for big biotech to recover until we see stabilization throughout the broad market. Of course, that's just common sense, given the insidious world crisis.

However, good things might happen once the selling music finally stops. Hedge fund redemptions are likely to wind down before year-end because everyone who wants out will be out. If the XBI and underlying components are at good technical positions at that time, they can easily lead on the upside for a period of months or longer.

The ETF is still holding a series of higher lows going back to 2006. This follows a positive trend you'll see on the majority of big-cap biotech. I'm pointing this out because the broad equity indices have already broken their long-term high-low patterns. This is the type of bullish divergence that can blossom after buyers finally return to the market.


Amgen (AMGN)
Click here for larger image.
Source: eSignal

Amgen ( AMGN) comes in just behind Genentech in market cap. It was mired in a deep downtrend well before the broad sector began to sell off last summer. The decline bottomed out in March, with the stock bouncing strongly and hitting a 52-week high just last month. It's pulled back sharply since then.

The stock needs to hold the 200-day moving average, which is currently near $53. It jumped above that level late last week despite intense selling pressure in the broad market. This resilience points to rotation that could mark the next phase in a recovery. But let's sit back and gather more evidence before too getting excited about the upside.


Gilead (GILD)
Click here for larger image.
Source: eSignal

Gilead Sciences ( GILD) has been a strong sector performer for many years. It rolled over from an all-time high in August and dropped nearly 40% into the mid-October low. The stock has been working its way higher since that time, but the recent wave of selling pressure exposes this issue to even lower prices.

The current uptick stalled at 50-day moving average resistance near $46, with the 200-day moving average sitting just above that level. Look for selling pressure to persist over the next few weeks, with a downside target at an unfilled gap between $32 and $34. A recovery from that deeper level could show great resilience and carry the stock higher in 2009.


Celgene (CELG)
Click here for larger image.
Source: eSignal

The weekly Celgene ( CELG) chart tells an interesting tale. It topped out at $75 in October 2007 and sold off. After bottoming out in the low $40s, it shot higher and returned to resistance in August of this year. A rollover at that level triggered a potential double-top pattern, but that isn't confirmed because the stock is still trading above the last low.

The stock remains in a healthy technical position despite two deep selloffs. The last downturn ended weeks ago at the 78.6% retracement of the 2008 rally, but it's still too early to buy because buyers haven't taken control at the low. I think it could be early 2009 before this stock finally enters a major trend, and I suspect that move will be higher.


All these issues show the potential for strong upside leadership, but we need to be patient and wait for better basing patterns. When the broad market begins its slow uphill climb, though, these names could sprint ahead.

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

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

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 Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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