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This morning's news that Johnson & Johnson (NYSE:JNJ) $51.68 - 1.10% received a non-approval letter from the FDA related to its New Drug Application for Risperdal Consta long-acting injection has shares of biotech stock Alkermes (NASDAQ:ALKS) $6.75 -57% plummeting as Risperdal Consta uses Alkermes' Medisorb drug- delivery technology.

While Alkermes (ALKS) is not a component of the Biotech Index (BTK.X) 335.91 -3.72%, it is a component of the Biotech HOLDRS (AMEX:BBH) $80.30 -3.48% and has put a sour taste on the tongues of sector bulls this morning.

The biotech-heavy NASDAQ-100 (NDX.X) 1,035.84 -1.48% and NASDAQ- 100 Trust (AMEX:QQQ) 25.79 -1.3% are also feeling the impact of biotech weakness this morning.

In Friday's market monitor, I mentioned that anatomic pathology testing services company DIANON Systems (NASDAQ:DIAN) $40.37 -24% had been downgraded by Thomas Weisel partners, noting that a proposed Medicare payments schedule could be a negative for pathology company's. Technically, we noted "suspicious" resistance that came into the stock at $60 and the bearish vertical count of $37 that was under construction. This morning's low of $38.86 is getting close to a bear's target from Friday, but the growing bearish count of $19 hints that there may still be some longer-term downside. However, a trader with limited capital may look to roll out of part of their position at current levels and roll to another put play in this group.

DIANON Systems Chart - $1 box

Put traders in DIAN have a nice short-term gain and the stock looks a little overextended to the downside here. A strategy after such a nice near-term gain would be to lock in some gains and perhaps roll to another stock in the same category that may also see some downside action on "fears" of Medicare payment restructuring.

Quest Diagnostics Chart - $1 box

Today's trade at $80 has shares of Quest Diagnostics (NYSE:DGX) $80.80 -6% looking vulnerable to its bearish vertical count of $74 dating back to early May. A recent trade at $85, set off the "bearish triangle" pattern in the chart of DGX and looks bearish.

Currently, I'd look to trade just 1/2 position in put option on DGX preferably "at the money." Look for any rally's back near $84 as better entry points, but with some of the downside action seen in the group, a bearish trader may want to have some exposure at current levels.

Jeff Bailey
Senior Market Technician
Option Investor

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