Healthy upside for Pharma
03/20/2007
Monday was a very constructive day for the stock market after Friday's retest of the 3/14 low of 119.57. However, I still consider all of the action off of the 3/14 low to be a countertrend rally, which when complete will roll over into another significant decline. Looking at the Dow Diamonds ETF (DIA) 4-hour chart, key resistance resides at 123.00 to 123.50, but the pattern 'allows' for strength into the 124-25 area prior to the expected rollover. 
While the Dow appears to have only a few points left in it short-term, according to our work, the pharmaceutical industry as represented by the Pharmaceuticals HLDRs ETF (PPH) has some potent rally potential. Last week's low at 75.30 held important 7-month support, as well as the sharply rising 200 DMA at 75.84 (after initially breaking below it). In addition, the decline off the 1/19 high at 80.50 into last week's low has the right look of a completed corrective leg amidst a glaring positive RSI divergence. The most beleaguered component of this pharmaceutical exchange-traded fund, JNJ, appears to be nearing a significant low, while PFE, LLY, WYE, MRK, ABT and the other key components look constructive technically (to compensate for the drag created by JNJ). All of this indicates to me that from a technical perspective the PPH is readying itself for a potent rally period. Be advised, however, the PPH, and pharma in general, is subject to continuous event and political risk, which may preclude some investors from participation. In other words, the PPH is not for the faint of heart! 
Mike Paulenoff is author of the MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.
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