By: Pej Hamidi
Why fight it? The Biotech Index is in all time high territory, as if 2008 and its fallout year, 2009, were just mere blemishes on this chart’s rise to astronomical levels. The chart displayed here is a monthly 5-year chart of the BTK. I’ve overlaid a Fib. Projection grid, which are the red lines, and you’ll also notice a Gann Fan, which are the dashed gray lines. What I try to look for when I do this type of chart work are major areas of convergence where there are multiple intersections of moving averages, fib. lines, and Gann Fan’s, as well as support & resistance levels. In this case, there are many but the most important one comes at the prior all-time high, which was tested in October and November of ’09. I’m not sure if you can tell without actually clicking on the chart below, but you’ll see that the prior all-time high fell right on top of the 100% Fib. line right after bouncing off a Gann Fann for an almost 10% correction.
There are 2 other variables quite close to that test of the all-time high, but I’ll let you find them. After testing 810, prices rallied directly to another intersection of key lines: the 161.8% Fib. line with another Gann Fann line. As soon as the 10-Month Simple Moving Average caught up with prices, it’s like the index went parabolic on us, making a b-line dash to the next key Fib projection of 281.8%. Everyone keeps talking about how “tech has led this rally”, but when you look at this chart, it makes you think again. Although AAPL, GOOG, BIDU and a couple others are at major highs, it’s really been the Biotech that’s been the high flier and most importantly, off the “talking heads on CNBC’s” radar.
What now? Well, the index just rallied over 30% in about 6 weeks, and is hitting that KEY 261.8% Fibonacci Projection. Therefore, I think the BTK is entering a short-term top, which is what we market-neutralists like to see in a sector we like to own. From here, perhaps a 50% retracement to 1100 or a 2/3 retracement to 1060. Either way, this chart tells me that a leading sector may enter a significant short-term correction. If it does, it won’t be alone as I suspect the whole market might. But as Sperl’s has been telling all of us over and over, “DO NOT FIGHT THE TAPE”. Instead of trying to short this market and get squeezed, wait for the pullback in leading key sectors and start buying the leaders when they’ve reached their key support/retracement zones.
Profitabe Trading to All and I’ll “see” you on the radio around noon to talk about some of the things I’m looking at that are working. The objective for me is to have the long and short side of my book working for me. That doesn’t mean “pairs trading”, although that falls under the umbrella of market neutral. My goal is to have a group of stocks that only rise because of the tide and when it comes time, I hit the bid. I also have a group of leading long stocks I want to buy on pullbacks. But the point is to try and make money on both sides of my book while staying not necessarily “Dollar Neutral” but in fact “Beta Neutral”, which is something I’ll explain when I head to NY to do a class on it.
