In the midst of the selling pressure last week, we mentioned that several indices across the equity markets were seeing key trendlines being tested. This was the case from style segments like small and mid-caps, to international markets, such as Europe. It is also true on the sector level, as we see in today’s Chart Of The Day focusing on the drug sector.
Specifically, we note that the NYSE Arca Pharmaceutical Index (symbol, DRG) is nearing a test of its post-2009 Up trendline (using a log scale).
As the chart shows, the Up trendline in question originates at the lows in 2009 and connects the lows in August-November 2011 as well as the lows this year, most notably in February and June. Naturally, pharma bulls would like to see prices hold above this trendline, which presently sits near the 510 level. Last week’s lows in the DRG came at 512-513 so a test of those lows would see the index squarely testing this trendline.
A break below this trendline (that is not immediately recovered) could open up further significant downside. One level below that could be targeted upon a break is the low set back in February around 475, or roughly a 7% drop. Below there, the 450′s area could provide potentially significant support in the form of the DRG’s former all-time highs set in 2000 as well as key Fibonacci Retracement lines from the 2009 low and 2013 breakout level. That would signify a more than 10% loss from the current trendline level.
While time will tell, we have our concerns about this trendline in the DRG holding. One such concern is the fact that the index has failed to approach its highs set a year ago(FLASHBACK>>July 17, 2015 Post nailed the highs: “The Long & Short (Term) Of The Pharmaceutical Sector”). While other indices and market segments have scored new highs this summer, the DRG has managed only a perfect 61.8% Fibonacci Retracement of its 2015-2016 decline.
Another concern has to do with the frequency of touches recently on the trendline. We have mentioned before that as the number and frequency of tests on a level increases, so does the likelihood of it being broken. So after seeing the trendline go untested for 5 years, the handful of tests this year do not bode well for the DRG’s odds of remaining above the line.
Thus, while it may make pharmaceutical investors sick to hear, in our view, this trendline stands a good chance of being broken sooner than later.
Editor’s note: Investors looking to target pharmaceutical companies should consider the PowerShares Dynamic Pharmaceuticals ETF (NYSE:PJP). The largest pharma focused ETF with over $1 billion in assets has fallen 9.62% since the start of 2016.
This article is brought to you courtesy of Dana Lyons.