Celgene Corporation (CELG) sent shock waves through the biotech sector on Friday after announcing that it would abandon Phase III research on GED-0301, a key drug application for the treatment of Crohn's Disease. The news triggered a flurry of bearish analyst commentary citing the negative impact on long-term growth, contributing to a 14-point decline that dropped the stock to a four-month low.
Biotech funds fell in sympathy, with selling pressure expanding into other blue-chip components throughout the session. The iShares Nasdaq Biotechnology Index Fund (IBB), which holds a 7.87% Celgene weighting, fell to a three-week low and into a test at the 50-day exponential moving average (EMA). More ominously, the weekly stochastics oscillator crossed into a sell cycle that predicts six to ten weeks of relative weakness, lowering the odds that the sector will participate in an end-of-year rally. (See also: Celgene's Sharp Sell-Off Is Likely Overdone.)
Celgene shares broke out above the August 2008 high at $38.69 in January 2013 and took off in a powerful trend advance, posting a long series of new highs into the July 2015 top at $140.72. The stock turned lower into August and plunged during the mini flash crash, trading in a 26-point intraday range that left behind an enormous fat finger reversal. The subsequent bounce stalled above $127 in the fourth quarter and rolled into an early 2016 decline that tested the deep August low.
Three additional tests into October 2016 carved a rounded basing pattern, ahead of strong buying interest that faded near fourth quarter 2015 resistance following the election. It pressed against that level into June 2017 and took off in a momentum wave, breaking out above the 2015 high in September but adding just seven points to October's all-time high at $147.17. It pulled back 12 points into last week's big gap, which has triggered a failed breakout and technical damage that could presage a long-term double top and breakdown, ending the multi-year uptrend. (For more, see: Celgene's $710 Million Bad Bet Drags Shares Lower.)
The current selling wave may not end until the $110 to $113 price zone, where a series of swing lows should offer substantial support into early 2018. A long testing period at new resistance is then likely, with aggressive short sellers reloading positions when the stock lifts into the high $120s. Accumulation-distribution indicators should offer actionable information at that time, telling us whether or not formerly loyal funds have abandoned long-term positions.
The iShares Nasdaq Biotechnology Index Fund broke out above the 2001 high at $109.30 in January 2012 and took off in a historic uptrend that topped out at $401 in July 2015. The August swoon established deep support at $284 that broke down in January 2016, dropping the fund to a 21-month low at $240. It tested that level three times into November and bounced to range resistance at $300 in March 2017, ahead of a June breakout that ignited momentum-fueled advances throughout the biotech sector. (See also: IBB: iShares NASDAQ Biotechnology ETF.)
The uptick stalled in September at December 2015 resistance just above $340, with that price zone also marking the .618 Fibonacci sell-off retracement level. A breakout into October made little headway, ahead of a downturn that is now setting off pattern failure signals. Like Celgene, the fund confirmed a weekly sell cycle at Friday's closing bell, telling shorter-term market players to take profits or tighten stops.
The rising channel since November 2016 marks support at $316, while the 200-day EMA has risen to $310, establishing a price zone that should attract buying interest following a pullback. In turn, that suggests an additional 5% to 8% downside, well within the risk tolerance of most investors. However, it's instructive to note that many long-term bounces fail at or near the .618 retracement level, eventually carving double tops. As a result, more potent sell signals will go off if the fund fails to hold that support zone. (For more, see: Biotech Funds Stuck in Neutral at Quarter's End.)
The Bottom Line
Celgene fell nearly 11% to a four-month low last week after admitting failure on a key drug application. The catalyst has generated sector-wide sell signals, aggravated by minor breakdowns into the news. Taken together, biotech stocks should now enter intermediate corrections that test the strength of the June breakout. (For additional reading, check out: A Primer on the Biotech Sector.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>