Zak Mir – The Great Drugs Bust?

You can get an understanding as to why I decided to go for being a technical analyst rather than a fundamental one 20 years plus ago,  by looking at the fundamental forces governing the pharmaceuticals sector. The problem is that even if you can identify whetherin the current economic environment the companies involved are set to flourish or not, there is still the issue of whether the stock market has been fair as far as the respective valuations.

Today I am going to focus just on the big three in the FTSE 100, GlaxoSmithkline (GSK). AstraZeneca (AZN) and Shire Pharma (SHP) but before we get to the charting picture for these three blue chips, it may be worth looking at why the fundamentals are a big problem here?

Austerity and Sovereign Debt issues have been forcing Governments to cut back on health spending just like in many other areas. However, as we are all aware, if nothing else, the problem since the financial crisis of the post 2007 period began has been one of how the bill for the ever growing numbers of sick and the elderly and other various assorted sacred welfare cows, can be culled without risking social unrest? Of course, they cannot. Therefore I suspect the spending continues apart from the odd cosmetic changes. This means that for the likes of the above big three drugs giants, and many others in the sector worldwide, it is likely that while the good times may not be rolling as they were pre 2007, many corporates would love to be in the relatively cash rich position that the pharma’s are.

Shire Pharmaceutical

Apparently one of the pillars of Shire’s business model is its treatment for so called Attention Deficit Syndrome, which is to my understanding, the drug that you give to children as a replacement for corporal punishment! Correct me if I am wrong!

The current charting position here is that we have what is effectively a post September double inverted head & shoulders reversal, one that has its right shoulder nominally at the 200 day moving average level of 1,896p. On this basis, it may be fair to say that while there is no end of day close back below the 200 day line we should be looking to a journey over the next 4-6 weeks for the shares to reach the top of a rising trend channel from June at 2,100p plus.

AstraZeneca

The price action of AstraZeneca since November has been of interest in the sense that we have witnessed a bear trap firstly below the black 200 day moving average 2 months ago and then the blue 50 day moving average last month. This, along with the presence of a rising trend channel on the daily chart since last March at the 50 day line at 2,932p. The implication is that while there is no end of day close back below the 50 day line we should be on the lookout for a break towards 3,200p plus on a 2-3 month timeframe.

GlaxoSmithkline

As far as GlaxoSmithkline is concerned, it is somewhat rather more difficult to look on the bright side as compared to either Shire or Astra given the way that so far in December / January we have seen the shares struggle to break back above former 2012 support in the 1,380p – 1,400p zone. The likelihood is that unless we see a decent break back above 1,400p for Glaxo by the end of this month the shares will have to return to the sub 1,300p zone, last seen in 2011.

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