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Technical Analysis: Biotech Breaks Out


Money is rotating and feeding off of sector breakouts -- biotechnology is the latest.

The health-care sector was riding high last week with breakouts in multiple names. Whether it was drug manufacturers like Merck (NYSE:MRK) or health-care service company like Cigna (NYSE:CI), the group was hopping. By Friday, another big part of the health-care rally kicked in: biotechnology.

The biotech sector has been consolidating for the past three months in a wide trading range. On Friday, the question of consolidation versus distribution was answered in a definitive manner -- with a breakout to the topside as seen on the daily chart.

Source: TA Today

Consolidations of significant duration can lead to large breakouts because, in neoclassical language, they end up creating multiple swing points on multiple time frames. In the case of the bitoech sector, that is exactly what occurred. After a three-month consolidation, two swing-point highs formed on the daily chart and one on the weekly chart. Thursday's break of the daily swing point highs saw significant follow-through on Friday as the weekly chart also experienced a clean breakout as a result.

Source: TA Today

Now it is about momentum. Breakouts on multiple time frames usually have the momentum to extend two to three bars without much hesitation, and they do that based on he highest time frame. In this case, the time frame is the weekly chart, so expect another week or two of extension. With a bullish ABCD target of $227 on the daily chart, and a range breakout target of $230-233 on the weekly chart, one can see the potential that remains and should be captured quickly if the biotech sector funds extend fast and furious -- as it should.

In a market loaded with mixed performance by individual stocks, the sectors and general markets continue to drive higher. Money is rotating and feeding off of sector breakouts with biotechnology being the latest example. Don't fight it. Go with it while it lasts.

Twitter: @tatoday
Positions in MRK, CI.
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