Thursday was bad for almost everyone, but the biotech and materials sectors suffered the most. Let’s look at sector ETFs and leaders of the decline to see why yesterday’s trading was so bitter.

After what had been a horrible week for the market, Thursday’s plunge was much worse than almost all expected. Those who had been calling for a bear market for the last two years were probably the only ones who were not surprised.

The market internals were some of the worst I have ever seen, with the Arms Index (TRIN) closing at 4.64, while the number of new lows jumped sharply to 441 from just 86 on Monday. The major averages are now already close to their next key support levels that I discussed earlier in the week.

The major market averages are oversold on a number of levels, and most are currently below their weekly Starc-bands. That said, they can still get more oversold...just like the bond and gold market can still become more overbought. There is the stretched rubber band effect that is likely to kick in at some point in the next week.

The markets are now nervously waiting for the monthly jobs report, although I have to expect that if we get a pretty bad number it is already factored into prices. The first signs of a short-term low would likely be when stocks stop declining on worse-than-expected economic news.

Though everything was slammed Thursday, there were a few individual stocks that stood out as they plunged much more than their respective industry groups.

chart

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Chart Analysis: Clearly Dendreon Corp. (DNDN) was the biggest loser of the day, as it dropped 67% on reports of disappointing sales for its prostrate cancer vaccine. An analyst’s downgrade added fuel to the fire.

  • It closed Thursday at $11.69 after making a high in May 2010 of $57.67. There is a bit of support from 2008 in the $10 area, but then the prior bear-market lows are much lower, around $3
  • Volume was heavy on the decline, as one would expect
  • Opinions on DNDN are now mixed—some are saying this drop marks a death knell for biotech, while others are actually looking to buy DNDN
  • Clearly, any rally in DNDN will have trouble surpassing the $15 to $18 area

The iShares Nasdaq Biotechnology (IBB) was also hit hard, down 7.8%—but compared to DNDN, that looks pretty good. IBB traded as high as $110 in early July.

  • The support from the 2010 high has been broken, with the longer term uptrend and more important chart support to follow in the $85-87 area (line b)
  • Volume was clearly heavy on the decline, and the downside target from the potential double top formation has already been exceeded
  • The uptrend in the weekly on-balance volume (OBV, line c) has been broken, and it has dropped below the prior lows
  • Bounces in IBB should have trouble getting back above the $100 level

NEXT: Another Big Loser

chart

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The materials sector was also not immune, as Walter Energy, Inc. (WLT), which produces and exports metallurgical coal (primarily for the steel industry) was down 29.5% on Thursday. It closed just above the major 38.2% support level at $76.95.

  • The key level to watch from a retracement and chart basis is in the $57 to $66 area, which encompasses the 50% support level.
  • Though the volume was very large on the decline, and the OBV is back below its WMA, it did confirm the most recent highs.
  • There is now strong resistance in the $93 to $95 area, which corresponds to the 2010 highs.

The Select Sector SPDR Materials (XLB) was down 6.7% for the day, closing at $34.40 and below the support from the 2010 highs. The major 38.2% retracement support from the 2009 lows is at $32.37.

  • The more important 50% support is now at $29.60.
  • As I noted in May, the weekly OBV had formed a negative divergence at the April highs, indicating that a weekly top was in place.
  • The OBV had just rallied back to its declining WMA in early July before its recent plunge. It would take a sharp reversal over the next few weeks before it bottoms out.
  • There is strong resistance in the $36.30 to $37 area, which corresponds to the June lows.

What it Means: There are two different messages. For biotechnology, while there are quite a few home runs in the sector, there are also disasters. It is particularly dangerous to hold them through earnings if the price action is neutral to negative.

For Walter Energy (WLT), the relative performance, or RS analysis on the materials sector has been negative since May, and that could have been helpful in avoiding the recent downdraft in this stock.

How to Profit: As we go to press, the monthly jobs data has just been released, and numbers were better than expected. The stock index futures are higher before the opening, but a higher daily close is needed to stabilize the market.

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