MARKET REVERSES HIGHER ON GOOD VOLUME -- BIOTECHS ARE TOP GROUP -- AMGEN COMPLETES HEAD AND SHOULDERS BOTTOM

BIOTECHS LEAD MARKET RALLY ... Biotechs are making a strong bid for market leadership. Thanks to a 52-week high by Amgen, biotechs were the day's top market group. Yesterday I showed the Biotech iShares (IBB) closing over their 200-day average for the first time since February. After retesting that new support level earlier today, the IBB closed at a new four-month high. The green volume bars show that upside volume is also looking strong. The IBB/S&P 500 ratio has broken out to a new four-month high as well. That means that biotechs are showing absolute and relative strength. Late last week I wrote that our main task in the second half of the year was to identify new market leaders. I'd put biotechs in that category. The biggest holding in the IBB is Amgen. The biotech bellwether scored a new 52-week high today on huge volume (Chart 2). It also broke through a major resistance line on its weekly chart.

Chart 1

Chart 2

AMGEN COMPLETES HEAD AND SHOULDERS BOTTOM ... I showed this chart yesterday to demonstrate the presence of a "head and shoulders" bottom on the weekly chart of Amgen. To complete that bullish pattern, the stock had to close above the "neckline" drawn over its 2004/2005 highs. It did that today in impressive fashion. That suggests an eventual test of its 2003 peak near 72 and possibly even its 2000 high near 76 (Chart 3). Given its large size, Amgen also had a positive impact on the Nasdaq market today and the healthcare sector.

Chart 3

Chart 4

DOW AND THE S&P 500 SCORE UPSIDE REVERSALS ... What started off looking like a bad market day turned into a pretty good one. Not only did the major market averages score upside reversal days, but they did it on exceptionally strong volume. Impressive as it was, however, the market still needs to show some upside follow through and start moving above initial resistance levels. For the Dow Diamonds, that would be the area just above 104. For the S&P 500 SPDRS (SPY), that would be this week's high at 120.65. Daily indicators like the MACD need to turn positive as well. One positive sign was the ability of the SPY to bounce off its 50-day line. Now it's a question of whether or not the market can build on today's turnaround. Earlier today I warned against overreacting to the morning's early losses. I wouldn't overreact to today's turnaround either -- especially since much of the day's trading was a reaction to the bombings in London. I'd give the market another day or two to settle down before drawing any major conclusions about its direction.

Chart 5

Chart 6