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Should You Get Off The Health Care & Biotech Express?

Posted by on Jun 15, 2015

Should You Get Off The Health Care & Biotech Express?

Friday’s selling in Sector Select Health Care (XLV) and iShares Nasdaq Biotechnology (IBB) pushed them down over 1% for the day. Despite Friday’s weakness the XLV is one of the top performing sector ETFs in 2015 as I noted in Friday’s Week Ahead column. The IBB has had even a better year as it is up almost 20% and the year is not even half over.

The fact that both ETFs had just challenged their all time highs makes a technician wonder if the short, intermediate or long term trend for these two market leading ETFs has changed.

In May 2011 the monthly relative performance analysis (RS) identified XLV as a market leader and it has recorded annual double digit gains every year since. The monthly RS line made another new high in May and shows no signs of topping out. The monthly on-balance volume (OBV) broke out in early 2012 and has remained above its WMA even during the sharp correction in early 2014.

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The weekly chart of the Sector Select Health Care (XLV) shows that has closed higher four of the last xix weeks and even managed a meager gain last week. It has been holding a above the monthly pivot at $73.99.

The rising 20 week EMA stands at $72.72 with the quarterly pivot at $71.98.
The weekly RS is above its WMA and still in a clear uptrend.
The weekly OBV did not make a new high with prices the week of May 22nd, line b.
It would take a drop below the OBV support at line c to confirm the negative divergence.
This would warn of a deeper correction in XLV.

The daily chart has support at $72.96 and the daily starc- band with the uptrend, line d, at $72.60. The late April low was $71.33.There is daily chart resistance at $75 which was Friday’s open.

The daily relative performance has made higher highs, line e, so far in 2015.
The RS is barely above its WMA with stronger support at line f.
The daily OBV did make a new high in late May, line g, but dropped below its WMA a week ago.
A drop in the OBV below last Tuesday’s low will start a new downtrend.

The monthly RS analysis of the iShares Nasdaq Biotechnology (IBB) is positive and did make a new high in May. In contrast the monthly OBV did not make a new high last month.

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IBB was lower last week and needs a weekly close above $368.25 to trigger an upside breakout. The monthly projected pivot resistance is at $387.59 with the starc+ band at $395.57. The rising 20 week EMA is at $346.95 with the quarterly pivot at $338.81.

  • The upper boundary of the weekly trading channel, line a, was overcome on a closing basis in March.
  • The weekly relative performance made a new high a week ago and it is above its WMA.
  • The weekly OBV has formed slightly higher highs, line d, with key support now at line e.
  • There is important OBV support at the early May low.

On the daily chart of IBB one can observe the fairly narrow range over the past three weeks. It has been able to hold above the monthly pivot at $356.56 while the monthly pivot support is at $345.28. There is daily chart support, line f, in the $343 area. If IBB can move above $369 the daily starc+ band is at $376.52.

  • The daily relative performance is now sitting on its WMA with additional support now at line g.
  • The daily OBV shows a more serious negative divergence, line h.
  • The OBV tested its flat WMA last Thursday before dropping back below its WMA.
  • A drop in the OBV below the June 9th lows will confirm a new downtrend.

What to do? For long term investors trying to time sector ETFs is always a tough proposition. The monthly analysis for XLV is clearly positive but it looks a bit weaker on the IBB. Timing the sectors is not as difficult for those who are traders. I would not be surprised to see a 2-4% correction in XLV while the IBB could lose twice as much.

The daily action, especially on IBB, does allow for a decline back to the $345 area and a test of the April low at $330.60 is possible.

For XLV a correction could take it back to the $72-$72.50 area or possibly the April lows in the $71.30-$71.50 area. A close below the $70 level would be more negative .

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