WEAK DRUGS WEIGH ON BLUE CHIPS -- BIOTECH SELLING PULLS OVERBOUGHT NASDAQ LOWER -- MARKET COULD USE SOME HELP FROM LOWER OIL

DRUGS PULL DOW LOWER... The Dow lost over a hundred points today. But most of the selling was concentrated in its three big drug stocks. The three top percentage losers were Pfizer (-4%), Johnson & Johnson (-3%), and Merck (-2%). Chart 2 shows Pfizer tumbling to a new 52-week low and on heavy volume. Chart 3 shows Johnson & Johnson shattering its 50-day line on rising volume. That made the drug groups the day's biggest loser. Biotechs also had a bad day which made for a weak healthcare sector.

Chart 1

Chart 2

Chart 3

PHARMA INDEX BREAKS DOWN ... The AMEX Pharmaceutical Index (DRG) fell to the lowest level in a year and is in danger of cracking its mid-2003 low (see weekly bars in Chart 4). The DRG/S&P 500 ratio line has been dropping since the start of 2003. [A relative strength line is simply a ratio of an index divided by the S&P 500 or some other market benchmark]. Which is one of the reasons I like to avoid market groups that are showing poor relative strength and that are trading under their moving average lines. I'm often asked why I favor groups that are moving up as opposed to groups that are falling. That's because groups that are rising usually keep rising, and groups that are weak have a way of staying weak. At least that's been the case with drugs.

Chart 4

BIOTECHS HURT NASDAQ... Three of the biggest percentage losers in the Nasdaq were biotechs -- Millennium Pharmaceuticals, Biogen Idec, and Chiron. The first two suffered only minor chart damage. MLNM fell to the lowest level in a month; Biogen is retesting its 50-day average. The biggest damage has come from Chiron, which has been tumbling on massive volume (Chart 7). That seems to have unsettled the entire group.

Chart 5

Chart 6

Chart 7

BIOTECH INDEX TESTING SUPPORT... Any chart damage done to the biotech group was minor in comparison to the drugs. Even so, the Biotech Index (BTK) is weakening on a short-term basis. Chart 8 shows the BTK retesting its late September low and its 200-day moving average. Its daily MACD line has turned negative. And the BTK/Nasdaq ratio line is correcting. This looks to me like a short-term pullback as opposed to a major trend failure. But I'll be watching the test of its moving averages lines.

Chart 8

NASDAQ 100 PULLS BACK FROM OVERBOUGHT CONDITION ... Today's biotech selling caught the Nasdaq 100 in a short-term overbought condition. The daily chart shows its 9-day RSI line trading over 70 for the first time since June. That's reason enough to expect some short-term selling. But not enough to turn bearish. Today's pullback was also on relatively light volume which is encouraging. The QQQ is still trading over its 200-day average. Today's pullback was enough to pull the broader Nasdaq Composite Index back under its 200-day line. The combination of higher oil prices -- and weak drugs -- were enough to cause some selling today. I doubt that today's action, however, will have any long-lasting significance. With allowances for a short-term pullback, I remain optimistic for the fourth quarter. I'd feel even more optimistic if oil started to weaken during October which has been its normal seasonal pattern.

Chart 9