BIOTECHS AND DRUGS PULL HEALTHCARE HIGHER

HEALTH CARE ETF EXCEEDS 50-DAY AVERAGE... Over the past week, we've shown some of the leading market sectors -- mainly financials and materials -- that were either breaking out to the upside or close to doing so. Today, we're taking a closer look at the one of the weakest sectors that's just now starting to show signs of strength -- healthcare. HC was in fact Friday's top percentage gainer. Chart 1 shows the Healthcare Select Sector SPDR moving above its 50-day average on Friday for the first time since mid-June. Its relative strength line, which had been declining since May, has turned up during August. This suggests that money is finally starting to move into this neglected sector. Most of the money is flowng into the biotech and drug groups which ended the week on a strong note.

Chart 1

BIOTECH INDEX EXCEEDS 200-DAY AVERAGE... Biotechs were one of Friday's strongest groups and are looking a lot stronger. Chart 2 shows the Biotech Index moving over its 200-day average after having broken a four-month down trendline earlier in the week. Its relative strength line has done the same and is now trending higher (see lower circle).

Chart 2

BIOTECH LEADERS... The next four charts show where most of the biotech leadership is coming from. Amgen, the bellwether of the group, has exceeded its 200-day line (Chart 3). Genzyme and Gilead are trading at six-month highs (Charts 4 and 5). Friday's biggest percentage gainer was Medimmune which broke its 200-day moving average. Its relative strength line is starting to turn up as well. Drugs also had a strong week.

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PHARMA INDEX TURNS UP ... The Pharma Index (DRG) broke through its 50-day line this week to turn its short-term trend higher. Like the biotechs, the drug group's relative strength line is also starting to improve. Some of the drug leaders are also shown below and include Abbott Labs, Johnson & Johnson, and Wyeth.

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S&P 500 IMPROVES BUT NOT ENOUGH... In my opinion, weekly charts are more helpful in spotting important market turns than daily charts. I showed the weekly chart of the S&P 500 last week and decided to come back to it again. That's because its message hasn't changed. As I pointed out last week, the S&P is bouncing from an oversold condition with its weekly stochastic bars turning up from the 20 area. In addition, the S&P is bouncing off its lower Bollinger Band. That's the good news. To signal a more important upturn, however, two things still have to happen. The S&P needs to close over its (dotted) 20-week moving average. And, the weekly MACD bars need to turn positive. The short-term trend has turned up. The market needs to do more, however, to turn its intermediate trend higher. In addition to higher prices, the market also needs to see more trading volume. That seems doubtful heading into the last week of summer.

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