Although automobile manufacturer stocks were the winners of the "Worst of the Worst" award for a terrible performance in 2004 and 2005, the pharmaceutical stocks at least deserve an honorable mention for the same category -- only they've stunk since 2002. But as you may recall, we switched gears on the car makers, going bullish on them in the July 19 Sector Spotlight.

Maybe the pharmaceutical companies are taking a cue from the auto makers, as they also seem to pulling out of a long-term slide. Although we expect the pharma stocks to remain as choppy and inconsistent as they have been for years, a few subtle clues suggest that it will at least be a bullish choppiness.

The Dow Jones Pharmaceutical Index (DJUSPR) hit new 52-week highs of 267.31 during the last full week of July, thanks to a 5.1% gain during that period. Initially we had our doubts that the index could hang onto those newly-reached levels...an opinion somewhat validated by a strong dip two weeks later. However, the index has made a full recovery, and more. A new 52-week high of 268.49 was reached last week, as the index tacked on another 0.56%...one of the very few indices to actually end up in the black last week.

Aside from the bullish break to new highs, it's also worth noting we're seeing higher highs and higher lows (framed in green lines) for the first time in a very long time. Something significant would have had to have changed to see this new complexion. Of course, we're contending that whatever change needed to evolve has indeed done so.

Although a little more ambiguous, we can also see a loose upside-down head-and-shoulders shape -- another bullish pattern.  The neckline isn't quite "textbook", but the premise is still basically applicable. That neckline/resistance is pegged at 269.56, where the index topped out in April of 2005. If the index can break above that line, it will represent a major breakout move, and we'd consider overweighting your pharma exposure then -- if you haven't already.

As for a target if and when the Dow Jones Pharmaceutical Index breaks past 270 or so, we'd say look at the 305 level (blue line). That's where we've seen trouble a couple of times before, and we wouldn't want to press our luck any further than that.

By the way, although we're generally bullish, you may want to wait for a better entry point than where we are as of today. The index is currently on the high end of its short-term range, and we may see a slight pullback before we actually get past any resistance line. On the other hand, as of right now, the index is pressing into new-high territory...so the pullback is not a guarantee. The point is, you may want to shop around before jumping in. 

Dow Jones Pharmaceutical Index - Weekly

Price Headley is the founder and chief analyst of BigTrends.com.