Charts 1 Analysts 0
The main object of this column this
column is to look for stocks moving on news, then resort to chart analysis to
determine whether to fade or trade the news. But make no mistake about it: The
chart speaks loudest. It speaks louder than analyst prognostications, louder
than the media, louder than fundamental reports from the corporations themselves.Â
On Monday, Chase Hambrecht & Quist
opened its 19th Annual Healthcare Conference in San Francisco. Ahead of the
opening, a prominent wire service suggested biotech shares “might get a
boost” from the conference fanfare. One fund manager pointed out that the
conference “tends to generate lots of optimism and it’s very important that
that sense pervades this time.”
The market wasn’t listening. Selling
again hit downtrending biotech shares, sending the Amex Biotech Index
(
$BTK.X |
Quote |
Chart |
News |
PowerRating)
to a 5.3% loss.
The biotech sector has been acting
ominously for months. The BTK peaked in October, then formed a series of lower
highs and lower lows, culminating in a head-and-shoulders top on the weekly
chart by December. My thanks to biotech bear and institutional advisor Bryan
Brown for calling this one to my attention. You can see it in my
Following The Money commentary.
To
help identify the strongest sectors and industries, I often look at the
funds that track those areas as well as their highest relative
strength stocks. In my Jan.
3 Following the Money, I pointed out that the Merrill Lynch’s Biotech
HOLDR
(
BBH |
Quote |
Chart |
News |
PowerRating) failed to make much of the tech rally, succumbing to resistance
at a major downtrend line. The basket of biotech stocks shed 9.5% on Friday,
decisively cracking below intermediate-term support, then fell another 4.7% on
Monday.
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Not even positive news on individual
companies could spare some of these stocks. Biotech HOLDR component Genentech
(
DNA |
Quote |
Chart |
News |
PowerRating)
on Monday said it would invest up to $300 million in efforts by OSI
Pharmaceuticals
(
OSIP |
Quote |
Chart |
News |
PowerRating) to develop a drug that treats solid cancer tumors by
cutting off their blood supply. Genentech also announced plans for more advanced
tests with Alkermes
(
ALKS |
Quote |
Chart |
News |
PowerRating), another Biotech HOLDR stock, on Nutropin
Depot as a treatment for growth hormone deficiency in adults. The drug already
is used to treat children.
Genentech fell 6.9%, Alkermes 4.1%,
OSI Pharmaceuticals 12.3%.Â
Some
heavy buying came in to lift these stocks off their lows. However, this alone
does not amount to a turnaround. As an intermediate-term trade, I could look
elsewhere for potential long trades. Notice that the closes came in at midrange.
Short-term, there’s a battle between supply and demand; intermediate-term, the
bias remains bearish.
My preachy
conclusion to all this: A few charts are worth a whole bagful of analysts. Â
In
the meantime, faced with sloppy market action, I continue my hunt for stocks
holding up well amid the adverse conditions, updating my watch list for high
relative strength, high growth stocks capable of benefiting when the market
ultimately turns. One name that is acting well is PeopleSoft
(
PSFT |
Quote |
Chart |
News |
PowerRating). The
stock is trying to complete the right side of a correction-recovery base. The
relative strength line could use a little more work. But you can see some recent
accumulation coming into the stock, and a nice intermediate-term uptrend behind
the current basing formation.
The top field of all
charts in this commentary uses a logarithmic price scale and displays a 50-day
price average in red.
In the second field, a blue relative strength line represents the displayed
security’s price performance relative to the S&P 500. The third field
displays vertical daily volume bars in black with a 50-day moving average in
blue for volume.
Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.
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