Biotech stocks offered relatively safe haven for speculative investors through most of 2008, but that's no longer the case. The broad sector topped out in late July, right after the Genentech takeover news, with the entire group falling prey to multiple waves of institutional distribution.

It's a shame, because -- theoretically, at least -- the sector can perform well during periods of broad market weakness, as we found out between 2000 and 2002. Considering how few stocks are raging buys right now, it makes sense to check the current status of these issues and determine whether their current malaise is the start of a more ominous decline.

Of course, biotechs are actually comprised of two market groups rolled into one. On the high end, we have blue-chip components that boast massive revenues and a broad variety of FDA-approved pharmaceuticals. At the low end, we have speculative start-ups and hopefuls, characterized by cash-starved research outfits and one-drug wonders.

I've highlighted dozens of small-cap biotech operations over the years, but it's clear that sector direction in the fourth quarter is dependent on high-end companies that affect the group indices and exchange-traded funds. So that's where we'll look for clues about storm clouds gathering in this very important corner of the market.

Biotech SPDR (XBI)

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Source: eSignal

The Biotech SPDR broke out to an all-time high in July, when it rallied above seven-month resistance at $62.38. The upside then accelerated with the July 21 announcement of Roche's takeover bid for Genentech. However, the rally stalled out near $70 just a few sessions later.

The fund pulled back for a week and then jumped back to the high, where sellers triggered a second reversal. This downdraft was strong enough to break double-top support at $65.19 and drop price into the 50-day moving average, where it's been trading for the last week. Price action since that time suggests this support level will not hold.

Look at two-month volume on the lower histogram and at the on-balance volume (OBV) indicator. These patterns reveal heavy distribution at the rally high, pointing to a major reversal that could trigger a selling spiral that carries price down to the 200-day moving average in the upper $50s.

Amgen (AMGN)

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Source: eSignal

There's been talk about Amgen's "resiliency" in the last few weeks, but there's a more bearish way to interpret price action since the July 28 gap lifted the stock to a 52-week high. The lazy movement points to a loss of momentum after the big event, with price now trading just a few cents from the opening print on the breakout date.

You can almost see the gravity on this top-heavy pattern. The weak price rate of change opens the door to a selloff that drops price through the range of the rally bar and back into the gap. At that point, every shareholder buying the stock on or after the breakout bar will be losing money. It's a prescription for a long pullback into the low $50s.

Gilead Sciences (GILD)

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Source: eSignal

Gilead Sciences , the biggest biotech after Genentech and Amgen, was a sector leader through the first half of 2008. The outperformance ended when its rally stalled in early June. The stock has been grinding out a broad sideways pattern since then. A break below the July low at $49.20 would complete a bearish double-top reversal.

However, there's reason to believe the support level will hold up and yield another strong recovery effort. The stock is now sitting at the 200-day moving average. It's dropped to this line in the sand multiple times since early 2006 and bounced firmly after each visit. So it makes sense to look for buyers to re-enter soon and lift price back to the high.

Celgene (CELG)

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Source: eSignal

Finally, let's look at Celgene , my longtime favorite play in the biotech sector. Its multiyear rally was interrupted in late 2007 when the stock dropped into a major nosedive that dropped price more than 40% in less than three months. It recovered nicely after the death-defying plunge, rallying back to the 2007 high last month.

The stock nosed 2 points above 10-month resistance, where sellers returned in force and triggered another downturn. That decline has now dropped price through the 50-day moving average. Sadly, there's still no evidence of strong buying interest returning to this stock, so a test at 200-day moving average support in the lower $60s appears likely.

With biotech's major players showing persistent selling pressure since late July, it's unlikely the broad sector or related exchange-traded funds will show much upside heading into the fourth quarter. In fact, we might need to wait until next year for this speculative group to finally bottom out and attract a fresh crew of eager buyers.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.