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Two More Weekly LCD Sell Signals

|Includes: GILD, IBB, REGN, SPDR S&P 500 Trust ETF (SPY), XBI, XLV

The US stock market failed to continue higher after Monday's rebound, and once again, the overseas markets are putting pressure on US stocks in early trading Wednesday. The Nikkei 225 was hit hard again as it lost 3.26% overnight, and there were greater than 1% losses in several of the Euro markets.

For the past week, the market internals like the NYSE Advance/Decline have been acting weaker than prices so a further decline would not be surprising. Some of the key averages like the NYSE Composite are already reaching the support from the April highs as it is down 2% from its recent highs.

It appears that traders are quickly moving from one sector to another, which has made the ranges even wider. Since May 2012, two of my favorite sector plays have been the Select Sector SPDR Health Care (XLV) and biotechnology. XLV is up 35.9% from last June's lows while the DJ Biotechnology Index is up 63.4%. They have both clearly outperformed the 28.6% gain in the Spyder Trust (SPY).

On a seasonal basis, health care typically tops out in late May so this, combined with last week's LCD sell signal, suggests that this market-leading sector may be ready for a rest. Health care broke out of a 12-year trading range last March so the longer-term outlook is still clearly positive. The charts can help us determine likely downside targets for health care, as well as two leading biotech ETFs.

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Chart Analysis: The Select Sector SPDR Health Care (XLV) hit a high on May 22 like many of the market averages and is down 4.6% from its high of $50.40.

  • The weekly starc- band is now at $46 with the 20-week EMA at $45.76.
  • The longer-term uptrend from the 2011 lows is at $45.70, which corresponds nicely with the major 38.2% Fibonacci retracement support.
  • The 50% support level is at $40.
  • The weekly relative performance did not confirm the recent highs, line b.
  • The RS line is still well above its WMA and the uptrend line c.
  • The OBV did confirm the highs with initial support at its WMA and then further at line d.

The daily chart of the DJ Biotechnology Index closed last week below the prior week's lows after making a high in May at 1183.

  • The daily starc- bands are now being tested suggesting that prices should stabilize or rebound in the near future.
  • There is first resistance in the 1225-1265 area.
  • The daily relative performance peaked in April and has formed lower highs, line e.
  • The RS line broke its support, line f, on May 31 just before highs.
  • The daily OBV also did not confirm the recent highs (line g) and then dropped below the support, line h, that goes back to the middle of March.
  • A rebound back to the OBV's declining WMA should be a good short-term selling opportunity.
  • The major 38.2% retracement support is at 1022, which is 5.7% below current levels.

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The SPDR S&P Biotech ETF (XBI) has assets of $758 million and its largest holding makes up less than 3% of the ETF. It has an expense ratio of 0.35%.

  • It triggered a LCD sell signal with last week's close at $107.52.
  • There is next minor support at $104.50 with the weekly uptrend, line b, at $101.93.
  • The April highs at $97 are the next major support with the 38.2% Fibonacci retracement support at $91.
  • The weekly studies have turned lower but are both positive as the RS line did confirm the highs and is above its WMA.
  • The OBV broke through resistance, line d, in the middle of April confirming the price action.
  • There is good support for the OBV at its WMA and then the uptrend, line e.
  • The key resistance is at the doji high of $113.53.

The iShares Nasdaq Bitoechnology Index (IBB) has assets of $2.58 billion but is less diversified that XBI as its top ten holdings make up 57% of the fund. Gilead Sciences (GILD) and Regeneron Pharmaceuticals (REGN) both make up over 8% of the fund. It has an expense ratio of 0.48%.

  • IBB closed above its starc+ band on May 13, which was one day before its high at $186.34.
  • Prices are now close to the daily starc- band with further support in the $170 area.
  • The 38.2% support from the November lows (not shown) is at $164.
  • The daily uptrend, line e, is a bit lower at $161.70.
  • The daily relative performance appears to have completed a short-term top as it has broken through support at line f.
  • The daily OBV did confirm its highs but volume was heavy in the past two days.
  • This has dropped the OBV below its WMA and is testing its uptrend, line g.
  • There is a band of resistance now in the $178.50-$180.70 area.

What it Means: Those who are heavily long health care or biotech sectors should have a plan in place as a further correction is likely this month. I would expect them to rebound in the next week, at which time I will look to take further profits on XLV.

How to Profit: Biotechnology is one sector I will be watching closely as the market corrects as some of the key stocks are already well below their highs and a further correction should provide good buying opportunities.

Portfolio Update: Still long the Select Sector SPDR Health Care (XLV) from $38.50 but have taken some profits as it has moved higher. We are using a fairly wide stop for now at $45.72.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.