Drug Pushers
On a non-eventful day,
let’s look at one of our plays that paid. Let’s
not waste time talking about the rather boring day in the Nasdaq Composite
as it spent the entire day digesting yesterday’s eye-popping gains.
Rather, I’d like to discuss a few groups that
we noticed last week were experiencing
significant distribution even as new price highs were being reached.
Those are the pharmaceutical and healthcare sectors. Last
week I pointed out that stocks like Merck and Eli Lilly were illustrating
negative divergences between their stock prices and technical indicators.
In addition, there were candlestick formations that appeared to be
“warning flares” that something might nasty was waiting up the road.
Today, Bear Stearns came out
pre-market and carpet bombed the sector by downgrading
Bristol-Meyers, American Home Products, Schering Plough, Eli Lilly
and Pharmacia. Last week the drugs could do no wrong, today, you couldn’t
find anyone to defend them.
Let’s look at a daily chart of MRK.
As shown on the chart above, I pointed out a
very negative candlestick formation
(a), which served as resistance for several subsequent weeks. The high
of this candlestick (a) is 96 11/16 and is extended forward with the
red line.
You can see that on the last trading day of 2000, there was a mark-up
of the stock (you don’t think by
fund managers trying to better their numbers,
do you?) in which the 96 level was again touched. However, with a negatively
divergent MACD, as shown by (b), and a highly negatively divergent
Williams Accumulation/Distribution
oscillator, as shown by (c), MRK was poised
to resolve this divergence with a swan dive to the downside. And dive
it did, and profit we did. Did
anyone notice any aftermarket specials on how great
the drug sector is? I didn’t.
Same situation with Eli Lilly. Let’s observe
the intraday 15-minute chart shown below.
As we once again see, there was a failed rally
on 01/02 in which breakout momentum
players were sucked in only to see LLY lose nearly 20% of its value
in the next 48 hours. LLY was
another drug stock that I had recommended shorting
last week due to its extremely negatively divergent technicals. In
addition, health care stocks like Cardinal Health (CAH) and United Health
Care (UNH) were pummeled
mercilessly this week as well. Another defensive “untouchable”
that was highly touted for many months, we are learning that nothing
can escape their dates with destiny when their internals are so overwhelmingly
displaying distribution.
For tomorrow’s market I am watching the
following:
Long Watch: Continue watching technology on
this pullback. There is no telling
when the Nasdaq will be ready to resume yesterday’s upside reversal.
Short Watch: PDLI, GENZ, MYGN and other
biotechs look vulnerable. In technology,
PMCS, AMCC, EMLX, JDSU look vulnerable to more downside.
Be patient and wait for your pitch. Don’t swing
wildly and try to make something
‘happen.” This is not a time to anticipate.