NASDAQ BIOTECHS / IBB

I haven't put out many recent updates for biotechs as they have just become too parabolic to consider chasing not to mention the "Don't fight the F_E_D crowd" who are openly fighting the F_E_D first with the end of an open ended QE3, unlike former QE programs. Then with the Biotechs and Social media stocks are overvalued, that sounds like a shot across the bow.

However as I have made reference to numerous times and in numerous ways, price action isn't always what it seems. In addition we look at the market from our experience which is if we want a position we simply place an order, typically it's going to come in around the bid/ask spread. However if any of you have traded in illiquid stocks without the help of viewing the book (Totalview, etc. something deeper than just Level 2) and have traded in illiquid stocks, you may have had the experience of having a winning position (on paper) filled at a loss if you're not careful as the bid/ask spread and size can change rapidly in an HFT market and illiquid stock. You might get part of your fill at the anticipated bid, but if the size wasn't there to fill it and you didn't have a view of what was available at the next level and the one after that, you may have run through a decent chunk of the stack on the bid side and ended up with a fill that gave you a losing position. For these large firms, this is every day life with HFT Iceberg hunters and other kinds of front-running, they have to fill in what I term a "Process", rather than the way we fill which is an event (one time).

When I was making the point that the leaders of one bull market are rarely the leaders of the next and showing the accumulation of homebuilders for a good year and a half as the Tech Bubble was imploding, the point at the time was, "Who would have thought boring housing would lead the next bull market?" and "How did they know a couple of years in advance?". However for our purposes, if you remember those charts, the lesson might be that it was a good year and a half of accumulation and some additional time before some of these stocks moved up to 4500%. Filling the orders at institutional size is a process. The same holds true for selling them. David Tapper's Appaloosa cut all of their AAPL and FB position as well as about a dozen others in Q4 of 2014 in addition to reducing their equity exposure by 60%, but that was 60% since the previous quarter. Appaloosa as Tepper warned in May of 2013 had been selling, "Everything not nailed down" and here we are in 2015 and he's still selling which just gives you some idea of how long it takes to move a portfolio the size of some of these institutional portfolios and what do they need to sell? As Tepper said in 2013, they need someone to buy which means price strength and market demand to absorb the supply, in the end when you look back at the completed market cycle, you'll likely see those buying Tepper's wares in 2013 were left holding the bag, although you may not see that now.

So we can't assume smart money didn't take Yellen's outright and unusual commentary and warning on the stock market to heart.

For our purposes, noting distribution and knowing when it is on the fine line between distribution and decline is a very different matter, but you can't be aware of one side without understanding the other.

As I said, I hadn't covered Biotechs for a while in a tactical way because I just didn't see the opportunity and it's certainly not an asset class I want to chase at these levels. However things are changing as we saw in December with the first failed Santa Rally in I can't remember how long and the first failure of the January effect in quite sometime, but more importantly we had forecast both events based on the charts in November/December, that's what was important, something had changed enough that those two seasonal rallies that are just expected like the sun rises in the east, failed completely.

OK, on to Bios and not just because they are having an ugly volatile day...

 IBB 30 min with an in line (confirmation) area to the left at the green arrow, a couple of dips that were accumulated and a large relative negative divegrence which is informative on its own, but not actionable on its own. Since, in fact since the New Year as we had suspected that Q4 2014 and full year 2014 window dressing was in fact straight up distribution as we now know from a number of funds' SEC releases like Appaloosa's or Soros's 600% increase in SPY Puts to the highest level he's held since 2008, it looks pretty clear the same trend was / is underway in biotechs (at least NASDAQ Bios as the divergence has transitioned from a large relative to the stronger leading through all of 2015.

While a 30 min chart is informative from a strategic viewpoint, it's not exactly actionable from a tactical point of view.

 Although less detailed, we can see a longer and confirmed trend (multiple timeframe analysis) is the stronger 60 min IBB 3C chart. To the left is price/trend confirmation, the same accumulation area (white) and the same negative divegrence since then and a leading negative since the start of 2015, but note how deeply it is leading; it is relative to price levels last seen in February of 2013!

 On a more tactical basis, but not quite there, the intermediate 15 min chart (excellent signals for swing moves, etc) shows recent confirmation which is why I have largely stayed away from any new tactical positions/entries in NASDAQ biotechs.

However if we zoom out a bit on the same chart we see a little different perspective, although it's still on a strategic level and not tactical.

 This is as far back as I can zoom out, but if I could push it a bit more, the blue 3C line would be right where price is as indicated by the two green arrows on the left side of the chart which means the area since February that is near term in line, on a strategic view is deeply leading negative which is part of multiple timeframe analysis, multiple trends all at the same time, just in very different timeframes.

 The 5 min chart is a lot closer to tactical and yet still provides an institutional strategic view. Note the "inline" confirmation to the far left at the green arrow and the relative negative divegrence at the red arrow and leading negative divergence at the red box.

The leading negative area seems to be around the 13th of this month.

 On a trend basis of a 2 min chart we have the same rough confirmation with a few more details and divergences that worked, I just didn't mark them as I don't want to confuse the chart too much with details I'm not trying to point out. The point is, despite some divergences we mostly have an in line trend at the green arrow which is why I have mostly stayed away from any biotech posts or positions recently, but once again the area of the 13th comes up with a negative divegrence on a tactical timeframe that goes leading negative during the last several days, the bounce/F_E_D knee jerk area.

The 1 min intraday chart showing the period in which we first forecast a bounce to come on March 10th also is a leading negative area with it worsening since the F_O_M_C, which looks like the knee jerk momentum has been used to increase the rate of distribution as the two things needed, higher prices and demand were both present.

Remember there's a channel buster and these are what we call, "Seemingly positive" events, but in every case I can remember posting, they have always been red flag warnings as it's the change in character which leads to changes in trends. Also as I have shown many times, volatility increases at the transition between stages of a stock/market's cycle whether on a weekly bounce or a primary trend.

Remember that accumulation area above followed by distribution, there it is right at the volume and a nice steady trend until we move in to the new year with a parabolic move which is a warning in itself and a Channel Buster, a "Seemingly bullish event", but more often than not these are red flags as we have seen these at nearly every important top (like oil in 2008, gold in 2011 which is a beautiful example that looks almost exactly like this).

Channel Busters are a type of head fake move and they will most often break to the other side of the channel, meaning below this one.

BIS (Ultra Short NASDAQ Biotechs) also has some interesting tactical signals recently.

Note the change in volume's trend and the huge volume today. Normally on huge volume like that with a bullish candlestick I'd be buying on a reversal, normally, but today is Quad Op-Ex.

 10 min BIS change in tactical trend.


Leading 3 min

As I showed earlier, the Trend Channel's Daily stop isn't that far away, especially for a Channel Buster as these tend to reverse fast.

Note the bullish Hammer in February and it's on a huge increase in volume which makes it 3-4x more effective. Since then the Trend Channel has held the entire move with a current stop on a closing basis at $347.50. Even if we get a fast moving reversal on the Channel Buster, I'd guess that the Trend Channel will lock in at least to the $350 area or better.

Beyond a short term swing trade, I would be patient with a IBB short or BIS long although I like the concept VERY MUCH. The reason is simple...

Even with this bearish long upper wick and heavier volume which indicates bearish churning to me, the reversal process is a process and not an event. The last 2 reversals weren't of a major primary trend and they were 2 weeks each. I think we have time to let the Channel Buster take effect and the Trend Channel to be stopped out, we'd still be in an excellent area for a position and we can monitor the charts every day until we see what we are looking for. I just don't believe "V" shaped market events are 1) very common and 2) very reliable. I'd say IBB short/BIS long is definitely on the list, I'd just let it price itself a bit first. MAybe set some alerts for a break of the channel around $325 and of course the Trend Channel at $350-ish.

There will be more updates in the coming days.