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Recent divergence from biotech needs monitoring

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The past two sessions have been that of DIVERGENCE for the biotechs as the Biotechnology Index (BTK.X) falls another 2% today. Recent analyst comments have been that there will be few FDA announcements or decisions for many new applications in this sector and those comments may have brought on some near-term weakness in recent session. Some may be thinking that with few catalysts of FDA announcements near-term, the money in some of these stocks is better slated elsewhere.

There are also those analysts that believe it is in the investor's best interest to be accumulating these stocks right now, before next late-year surge in potential breakthroughs and that year 2003 may be a blockbuster for the group.

Biotechnology Index Chart - $10 box

The recent pullback in the biotechs looks normal and orderly if it were not occurring during a nice little two-day rally in the broader NASDAQ Composite. Sector bulls want to see this index hold above the $530 level. I'm using the $10 box scale as this is the scale most institutions are monitoring this index on. A break of the $530 level then puts into play the current bearish vertical count of $470. Sector bulls looking for a bullish entry point may want to wait for a move back above the $570 level and continue to follow with a stop at $530 in the index. A trader playing some stocks in the group should be monitoring his/her stock along with the index.

I'd also monitor this index against the broader NASDAQ and NASDAQ-100 right now. In its infinite wisdom, the NASDAQ-100 added several biotech stocks to that index late last year as many stocks in the group greatly outperformed many other technology names. The biotechs have a greater impact on things today than they did a year ago. A break below the $530 level could put some pressure on the QQQ's.

Jeff Bailey
Senior Market Technician
Option Investor

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