IBB Biotech ETF Drops Into Oversold Territory

The iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) lost as much as 15% since last Friday and is now at a rare short-term oversold level.

Over the last year, there were only four times the RSI 2 dropped below four. The vertical green lines highlight the prior instances. It led to a rebound every time.

The chart also shows strong support (various trend lines and 50-day SMA) just below current trade (330 – 333).

If history repeats itself, IBB should bounce here. But will this time be different?

Sunday’s Profit Radar Report spotted an ominous red candle high and warned that: “The iShares Nasdaq Biotechnology ETF (IBB) saw a high volume reversal (red candle) on Friday. Nothing epitomizes catching a falling knife like picking a biotech high, but this is a development worth watching for aggressive traders. The corresponding short biotech ETF is the ProShares UltraShort Biotech ETF (NYSEArca: BIS).”

 

This red candle high is still in play and volume really picked up during yesterday’s selloff (which could also be interpreted as washout decline).

Biotech shorts already pocketed nice gains, but as long as support holds, odds favor at least a bounce. Only a drop below will unlock further down side.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Weekly ETF SPY: Nasdaq-100 and QQQ Reversal Candles

The stock market sold off sharply right as Mr. Bernanke spoke before Congress, but there were other – more predictable reasons – for stocks to fall: Sentiment, seasonality and technicals. Here’s the technical analysis that kept investors ahead of the trend.

On April 24, the S&P 500 broke above its all-time high at 1,576. Since then the Profit Radar Report analysis has been focused on the Nasdaq-100. Why?

Unlike the S&P, the Nasdaq-100 (and its corresponding ETF, the PowerShares QQQ) trades well below its 2000 high. There are fewer resistance levels for the S&P 500 – an index trading at all-time highs – compared to the Nasdaq-100.

Support and resistance levels are effective tools to manage risk, so it made sense to switch ‘vehicles.’

The weekly chart below shows the two trend lines we’ve been focusing on. The green trend line goes back to 2008 and is key support. The red trend line served as initial target and now early warning indicator.

Wednesday’s giant red candle high (daily chart) looks significant for a number of reasons:

1) It’s a reversal candle that engulfs the four prior candles and occurred right against the long-term trend line as well as short-term resistance at 3,050.

2) Sentiment was getting too bullish: The May 19, Profit Radar Report warned that: “The increasing number of bullish polls and money flow indicators shows that risk is rising and we will be alert for a change of trend.”

3) Seasonality is about to turn sour as pointed out by the May 19, Profit Radar Report: “Based on post election seasonality stocks are due for a pullback in a week. VIX seasonality projects weakness for late May/early June.”

Reversal candles are not foolproof. For example, a reversal candle for the Dow on February 25 did no lasting damage.

But unlike the Dow’s February 25 candle, yesterday’s reversal was the common denominator of all major markets.

What’s Next?

We looked at the Nasdaq-100 because it gives us the support/resistance levels needed for risk management and low-risk buy/sell triggers. Let’s take advantage of them.

Prices often retest a previously broken support level, so a move up to the red trend line would be a low-risk opportunity to go short. A stop-loss should be used as a move above the red trend line would point to a continuation of the rally.

Selling tends to accelerate when support is broken (this was true with the red trend line). Therefore, a move below the green trend line would unlock lower targets.

Based on past experience, stocks should bounce to digest yesterday’s decline. There’s an open chart gap for QQQ at higher prices. At least that chart gap should be closed.

This week’s ETF SPY is more ‘special’ because it includes information generally reserved for subscribers to the Profit Radar Report. >> Sign up for the Profit Radar Report if you’d like to enjoy this kind of analysis.

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What The Dow’s Big Red Reversal Candle Means

On Monday the Dow spiked within 120 points of a new all-time high before falling hard. In fact, Monday’s red candle engulfs all of the 21 previous candles. However, the bearish candle is in conflict with bullish short-term indicators.

The Dow Jones Industrial Average (DJIA) reversed trends with an exclamation mark on Monday. After spiking to a new recovery high, the DJIA (corresponding ETF: Dow Diamonds – DIA) fell to a 21-day low.

A chart simply and elegantly displays a ‘bad day’ like this with a big red candle. This one red candle engulfs the 21 previous candles (shaded gray box).

This red candle high is also called a reversal candle. Candles like it tend to mark trend reversals. In this case from up to down. This doesn’t mean the Dow can’t and won’t eventually move higher (short-term bullish developments discussed below), but it cautions of lower lows ahead.

Two other facts enhance the message of this red candle. The high occurred right against a parallel channel anchored by the June/November 2012 lows and September 2012 high.

Perhaps even more importantly, the Dow stalled and reversed just before its all-time high water mark at 14,198.10. The Dow’s all-time high is huge resistance.

The February 18 Profit Radar Report referred to the all-time high resistance: “Next week has a bearish seasonal bias. With its all-time high just ahead, the Dow has a well-defined resistance level for a short trade. Aggressive investors may short the Dow close to its 2007 high with a stop-loss at 14,200.”

At the Profit Radar Report we call this kind of a trade a low-risk trade. Why? Because we were only 200 points or 1.5% away from the stop-loss level.

One Swallow Doesn’t Make a Summer

But one swallow doesn’t make a summer one one red candle doesn’t make a bear market. After two 90% down days (February 20, 25) stocks were likely to rally. That’s why Monday’s (February 25) Profit Radar Report recommended to cover short positions at S&P 1,491.

In addition the VIX triggered a sell signal (buy signal for stocks) yesterday. Although I think that stocks will slide to a lower low, it will take a break below support or a spike to resistance to place a possible short bet. Important short-term support/resistance levels are outlined in the Profit Radar Report.