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Biotechs lead sector gains

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Today's 3.57% gain in the Biotech Index (BTK.X) has this sector leading the gains for the NASDAQ Composite (COMPX) after a recent three-week drubbing. Are the biotechs starting to put in a bottom near the $510 that could help firm the NASDAQ? Time will tell, but current action looks like some short covering.

Biotech Index Chart - Daily Interval

Today's rally in the biotechs is most definitely giving some relief to the recent decline we've seen in broader technology, but when I see one of the weaker technology group post the larger amount of gains, I become suspicious of short covering as bears lock in some profits. In a more "bullish" market environment, the stronger sectors will show leadership. We'll see how the biotech's respond at the rapidly approaching 200-day MA, which is still trending higher at this point. What NASDAQ bulls will most likely be looking for is bullish action in this group above the now rounding lower 50-day moving average at $575. We might well expect some type of "collision" to take place at the $562 level in coming sessions at our 38.2% retracement level, which may correlate well with the 50-day as it continues to roll lower based on recent days trading in the index itself. Until then, we'll set an alert at the 200-day MA of $545 to alert us to further strength. I would expect some bears with "conviction" to be looking at some shorts in this group on any rally near the $560 level and look for them to target the recent lows of $515 and possibly the $495 level.

The Semiconductor Index (SOX.X) is posting a nice gain of 3.6% today after yesterday's trading at the $500 level. The bar chart technicals are perhaps weaker for this group as the 50-day MA (at $541) is still below the marginally trending lower 200-day MA (at 553). I'm looking for some near-term resistance at the $555 level as a potential short/put opportunity. Semiconductor bulls would be best served to stick with the bigger names in the group like Intel (INTC) that provides a tight stop just under $31 (retracement from $38.59 to $19.30 has 61.8% retracement at $31.22).

With the current market internals of some of our bullish percent data giving "bearish" and "bull correction" reading, bullish traders should be buying time and limiting bullish positions to 1/2 or 1/4 positions at this time.

Treasury bonds continue to see selling and this will make the bulls case for a recovering economic picture as cash comes free from this part of the market. The recent economic data along with a relatively few extremely bearish earnings surprises will make the case for fundamentalists to begin getting more aggressive with their economic recovery talk. This quarters earnings are starting to look like a bottom, and going forward, bulls will need to see stability and some quarter-to-quarter growth.

Jeff Bailey
Senior Market Technician
Option Investor

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