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Biotechnology Looks Weak

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While the rest of the market continues to enjoy nice gains, biotechnology stocks are getting left behind, up only 0.26%. Medimmunne (MEDI), Genzyme (GENZ), and Celera Genomics (CRA) are posting $1+ gains, but losses by big caps Amgen (AMGN) and Biogen (BGEN) are holding back the sector.

A $6.37 drop in Vertex Pharmaceutical (VRTX) is also hurting the sector. The company announced that it is canceling the development of one of its arthritis medication due to negative affects on animal's central nervous systems. While resources are being shifted to other anti-inflammatory drugs, the company's financial performance could suffer.

Biotechnology Point and Figure Chart

The fact that the Biotechnology Index (BTK.X) has held above its April low is good sign, but that could be the very reason why the sector is moving higher. Money that found its way into the sector last week might now be coming out and finding its way into beaten down stocks. The sector should be okay as long as support at 410 holds, but might not get a bounce until other beaten down sectors catch up. Relatively speaking Biotechs are still stronger than the S&P 500, but that could change soon. BTK's relative strength chart (not shown) has reversed into a column of Os, and is one box away from giving a sell signal. How some of its components hold up will determine the fate of the Biotechnology Index.

Jeffrey Canavan

Biotech Drivers

Amgen (NASDAQ:AMGN) is the largest component of the AMEX Biotechnology Sector Index (BTK.X). In other words, the stock has the clout to move the index.

Today, despite the strong buying interest across the broader market, shares of Amgen are trading heavily. The stock is flirting with a key support level at the $55 area. Key, not only for its level on the bar chart below, but also because of its significance on the point & figure chart.

The $55 level has obviously provided support in the past as evidenced by the chart above. But, should Amgen print $55 today, it would break a double-bottom on its point & figure chart. If the stock does print $55 today, it obviously wouldn't be a cataclysmic event. However, it would be a sign that supply continues to overwhelm demand in this stock, which could potentially indicate further weakness in the broader biotech sector.

Unlike Amgen, Biogen (NASDAQ:BGEN) - another hefty BTK component - has already broken below its recent double-bottom on the point & figure front. BGEN's print at $53 signaled the breakdown earlier this morning.

Here again, BGEN's breakdown is merely anecdotal evidence of implied weakness in the biotech sector. Should the broader market show any signs of weakness going into the close today, or any sort of pullback early Tuesday, the biotech sector should set up for a good trade to the downside.

Obviously, further weakness in the biotech sector today, while the market is moving higher, would confirm the bearish thesis over the short-term. And a print at $55 in AMGN would, too.

These type of divergences, when detected early, can offer short-term traders excellent profit opportunities. It's hard to say whether or not we're late in our observation of the weakness in the biotech sector today, but it's worth monitoring over the next few days.

Eric Utley
Option Investor

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