Technical Strategy Video:
Key Takeaways
- Trends look to be joining momentum back lower following Thursday’s abrupt reversal. QQQ closed at the lowest levels since October, and cycles show possibility of weakness into late January before much relief.
- Biotech looks to be nearing key make-or-break levels after severe weakness in recent weeks. Key stocks to favor in this group discussed
- Pharmaceuticals remain a better way to play Healthcare near-term, and this group has broken out relatively speaking vs Biotech coinciding with recent market volatility.
QQQ (Invesco’s QQQ Trust) has now closed at the lowest levels since late October, and underperformed DJIA and S&P dramatically on Thursday. Increasingly, this pattern looks vulnerable to pulling back to break early week lows. This daily chart shows QQQ having morphed into a large consolidation pattern since November which has been largely choppy and uninspiring. Yet, the wave structure on the recent decline from late December was clearly bearish from a structural perspective and had negative effects on momentum. Furthermore, Equal-weighted Technology violated a one-year uptrend vs SPX this past week. Bottom line, weakness down to 355 is possible technically into late January, with breaks of that leading to October lows at 350.32. Pullbacks to this area should constitute good trading support.
Healthcare has turned out to be a very mixed picture so far this year. While I endorse Healthcare as being a group that should outperform in 2022, Biotech has been the worst performing sub-sector within this space and still hasn’t shown much evidence of slowing down in its descent. Pharmaceuticals have largely outperformed much in this space and broke out relatively vs Biotech a few months ago.
My Report from 12/17/21, “Biotech on the Comeback trail” definitely looked to have been premature, and now this group has suffered further in recent weeks, pulling back to an area of even more important support. As charts below show, this area near $98 is important given that two prior highs going back since 2018 peaked out right in this area. Former resistance could now become support on weakness, and the area near 98 should translate into an important area for this decline after XBI 0.76% has lost nearly 28% in less than two months, and more than 40% since last February’s peak.
Overall, while I endorse Healthcare as being an attractive area, one needs to steer towards the areas of strength, vs trying to bottom pick the stocks hitting new multi-month lows. However, for those looking, preferred stocks within Biotech from a technical perspective to consider are: REGN, GILD, AMGN, VRTX, ALNY and BIIB. Biogen remains quite weak, but has begun to stabilize near lows hit six years ago and looks like an attractive counter-trend play within this space.
Pharma has broken out vs Biotech and additional relative strength likely
While Biotech ETF’s like XBI have been sliding in recent months, Pharma has held up quite well relatively speaking per DRG’s resilience. Thus, ratio charts of Pharma vs Biotech have just broken out of relative downtrends which have been intact most recently since 2018. (Ratio chart of XPH vs XBI shown below) (The larger downtrend in Pharma vs Biotech has actually been ongoing for a decade )
Given this multi-year trend breakout in this sub-sector ratio of Healthcare, it looks likely that Pharmaceuticals should outperform Biotech further in the weeks/months to come. Attractive stocks within the Pharmaceutical space to consider technically for those looking center on the following: PFE, LLY, MRK, JNJ, BMY, and ABT.
While not shown below, other sub-sector relationships of importance like XBI vs. XHS, still favor XHS, or the Healthcare Services group. Meanwhile, ratio charts of IHI vs XHS show much greater strength in IHI, representing the Medical Device names. Below is the above-mentioned chart of XPH vs. XBI, with the breakout signifying outperformance in Pharmaceutical stocks vs. Biotech which should likely continue on a relative basis.
