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It seems odd to caution about a leadership sector such as biotech having problems on a day when the Dow Jones Industrial Average busts out of the gate with a 200-point gain. But that is where the evidence pointed last week and still does today.

Healthcare in general and biotech specifically have been leading the market for the past four and a half years. In 2011, the trend for the iShares Nasdaq Biotechnology exchange-trade fund (ticker: IBB ) suddenly accelerated (see Chart 1). And it kept accelerating into the steep advance that has been in place since last year.


iShares Nasdaq Biotechnology Some will argue that the chart shown here should have a logarithmic price scale due to the very large price change over the years. However, a “regular” or linearly scaled chart makes the trend acceleration clearer, which is important for grasping what is happening.

Aside from the steep slope of the trend we can also see a bearish condition in momentum. While prices made higher highs, momentum indicators such as the relative strength index (RSI) made a lower high in a condition called a bearish divergence. It means that the power behind the rally is waning and a breakdown is now a good possibility.

Zooming in to the short-term chart, there are more areas of concern. The first is a weekly reversal three weeks ago, which starts with a jump to new highs and a steep sell-off to end the week with a net loss (see Chart 2).

 That decline brought the ETF down to test its short-term trendline from last October, when it and the market in general suffered steep corrective declines. On August 6, after a few days of low-volume recovery, it sold off again hard as component stocks such as Gilead Sciences ( GILD ) and Biogen ( BIIB ) suffered steep losses. This time, the trendline was broken to the downside.

This is not a definitive breakdown just yet because it is still small in the context of a multi-month advance. However, when a leader stumbles we must take notice. Has everyone who thought about buying biotech already done so leaving demand weak? Or is it simply that no sector leads forever and it is just time for it to relinquish the leadership mantle to some other group?

We cannot know that for sure but we can dig deeper to find out if it is time to take some money off the table. My conclusion is “yes.”

One good place would be biotechnology research and diagnostic products maker Bio-Techne ( TECH ). This stock set an all-time high last week as it jumped up after beating analyst estimates for second quarter earnings and also declaring a dividend.

But after digesting the news, it was not good enough for the market as the stock fell back to a net loss on the day. The chart was left with a bearish key-reversal day with jump to a new high and a close below the previous day’s low (see Chart 3). And even during Monday’s market-wide rally, Bio-Techne could barely muster a gain. That makes it a great candidate for profit taking and for aggressive traders a good possibility for betting on further losses. There is no support on the charts until roughly $103 at the top of the March-June trading range (the stock traded near $108.50 Monday afternoon).

Biotech is still hanging on to its rising trend but weaker momentum and several sharp price drops in component stocks sound a warning. And if this stalwart leader starts to fall the broad market will have yet another reason to weaken.
 Biotech Bull Is Starting to Show Cracks, Say Charts


