Let’s take a look at the popular IBB daily chart–IBB is the ETF symbol for the Bio-tech sector of the pharmaceutical stocks. Based on my chart analysis and recent data from the CBOE on put-call ratios, I believe it may be time to short biotechs. The IBB found a bounce off the 50 day line as it has the last 4 to 5 times since breaking out of a consolidated base a few months ago. Investor’s Business Daily (“IBD”) often warns that anything beyond the 2nd tag of the 50 day after a base breakout is a warning sign of a stock or index that is starting to lose momentum. Also, look at the recent top near $375…that resembles a blow off top because it spurted almost 7 points beyond the top of the Bollinger Bands and then tumbled like a rock. The Bollinger Bands, or BBs for short, represent a mathematical method to calculate the largest parameters above and below a stock’s recent price track. The majority of the time, the price of a stock or index will tend to stay within the trajectory path of the BBs. When price exceeds the boundaries of the BBs, this is said to be excessive, and chart theory holds that the price will likely snap back within a short period of time to make price “more normal.”
Also, pay attention to seasonality here: IBB is in a very similar position as it was one year ago at the end of March; that is, it showed a near similar blow off top following a late 50 day bounce which led to a big correction in April and May of 2014. Does history repeat–strangely enough, it is not all that uncommon for a similar repeat when it comes to stocks.
I am tempted to buy a put contract on IBB as it checks off against the down-turned 13 day line….but I will wait until Monday because Monday mornings have been known to lead to bio-tech merger and buy-out announcements. So, it is best to wait until Monday morning to be sure no announcements might stand in the way of a successful short entry. This would be intended as a short trade over several days if not weeks. Be sure to visit our Forum: Talking Stocks or simply google the words “Talking Stocks” to find up to date commentary on this trade as well as many others by traders of various skill levels. (Be sure to read the disclaimers of the forum before proceeding.)