Even Biotech Bulls Should Be Watching This Level
If there must be a poster child for the 6-year cyclical bull market, it is likely the biotech sector. At least that is certainly true for the post-2012 straight up run. The NYSE Arca Biotech Index (BTK) hit an all-time high of 4457 on July 20, up just over 4000 points since its 2008-2009 lows. 3000 of those points have accrued since the start of 2013.
The one problem with bubbly advances like that is beta. Considering the BTK’s gains over the past few years, the ride has been relatively smooth with no closes below its 200-day moving average. However, the pullbacks along the way have been pretty sharp, on an absolute basis. The BTK ran into a 24% pullback in spring 2014 and a 14% pullback this spring. Each time it recovered successfully to yet another new high.
That brings us to the recent decline. At a high to low drop of 24% from July to August, the magnitude of the decline was on par with the 2014 correction. However, this one arguably did more technical damage, with the BTK dropping (well) below its 200-day simple moving average and even forming a lower low below the spring low. This doesn’t mean the biotech bull market is over, but, in our view, the challenges to attaining another new high are more formidable this time. And that challenge should begin in earnest at the fast-approaching level around 4060.
Here’s why we think that.
As the chart shows, several key possible points of resistance lie in the vicinity of 4060, including:
- The 61.8% Fibonacci Retracement of the July-August Decline ~4058
- The August 19 breakdown level after which the decline began to accelerate ~4048
- The 50-Day Simple Moving Average which currently sits ~4065
In our view, this trio of levels should make for tough sledding for the BTK in this area. Of course, within a highly volatile period like the present, some leeway, including a short-term overshoot of the level cannot be dismissed. Thus a temporary spike above this 4060 level that is quickly reversed would not be surprising and would actually reaffirm the area as valid resistance.
And that is not to mention the aftermath of today’s Fed meeting. We have no idea what’s going to come out of it – or how markets will react. In such circumstances, chart levels on all asset classes anywhere in the world can be rendered impotent in the short-term. Thus, as always, anything is possible.
However, in our view, this level near 4060 should be a stiff challenge for the BTK to quickly overcome. It may be that the index recovers the level at some point down the road, and even moves on to another new high. However, in the shorter-term, this level should present a challenge, particularly if the broader market has more work to do in stabilizing itself in the post-crash period.
Thus, even for biotech bulls, which would include us over the past 12 months, this area may be one to keep an eye on for signs of a struggle.
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More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
