IBB / NASDAQ BioTech Follow Up

Last Thursday I put out an alert and Trade Set-Up: IBB NASDAQ Biotech Index (short) followed just after by the charts, IBB follow up.

The main concepts with regard to IBB was the very clear head fake set-up area in effect and the move above it almost certainly going to be confirmed as a head fake. This is one of the best head fake set-ups in the market, along with NFLX which was interesting as you saw the actual head fake (Icahn using the 7:1 split to exit on a gap up and then announce it to the world, meaning he likely went short after closing his longs).

This is a chart and an excerpt from Thursday's post above showing the head fake set-up, for all of the what, where and why's, see the linked post above.

However in this dead flat trend which IBB hasn't broken higher since March and that failed at that, it also created a clean, clear, very obvious area of resistance with the last 3 trading weeks not seeing more than 0.11% movement up until yesterday, a very clear resistance range and a very popular asset.

So now we check the charts since. The first thing that stands out is the lack of follow through for a breakout such as this.

 Daily IBB chart with the clear resistance zone with absolutely 0% movement from 3/20 to 6/16, that's setting up a very obvious resistance level which will attract attention when broken, thus an excellent head fake set-up. Since you can see (in yellow)  there has been no follow through.

In fact to impress upon you the concept of the Market being the number one directional influence to any given stock or industry group on any given day, responsible for about 2/3rds of an individual asset's movement, I give you the comparison chart below.

This is IBB 5 min since its break above resistance and the SPY of all things in red , note the near perfect correlation. This is because the overall market is the greatest influence followed by sectors/industry groups. The basic lesson from this is that even regular, ordinary market updates can tell you a lot about a particular asset you might be looking at. If the market isn't looking good or if the market looks ready for a bounce, probabilities are extremely high that whichever asset you are looking at, it's likely t do the same thing. The markets have become extremely overcorrected and to a large degree, are no longer a stock pickers market which is why I often prefer a simple ETF or leveraged ETF for a trade rather than a stock specific asset as the risk with a stock specific asset is news, especially among biotech. The ETF is not effected by news so I can remove one wildcard or some uncertainty with general ETFs that aren't effected by stock specific news.

To determine whether an asset's move qualifies as a head fake or in this case a false breakout, which we usually have some idea where the probabilities are before the event occurs, we check the asset during the head fake process and look for confirmation or divergences in either direction.

 The 4 and 6 hour charts show a negative divergence on a very strong timeframe during the range (yellow trend line) from which there was 0% movement from 3/20/2015 to 6/16/2015. This tells us before the move above the range even began, that any move above such an obvious range which is a high probability move, is likely to be a false move or a failed move (head fake).

Although I don't have enough price history on this 1 min intraday chart to properly scale 3C to price as the moves have been so large in 3C recently, the main point survives my scaling difficulties; from the first parabolic push higher through the range, the fastest reacting 3C timeframe (1 minute chart) was already showing distribution in to higher prices. You may remember from the BofA/ML net selling/buying by client type that "Health Care" saw some of the heaviest distribution last week, guess what sector bio techs fall under? Health care. The chart since then has not improved, has not moved toward confirmation, but rather a new leading negative divergence.

 This is the 10 min chart from last Thursday's post, IBB follow up. There was good trend confirmation and the start of a negative divergence on the breakout as seen above.

The same chart as of just a few minutes ago looks like this...

 This is the exact same timeframe for IBB, the exact same zoom factor. I'm sure you can make out the differences in 3C since then which should have moved higher and confirmed price if it wasn't being sold in to like everything else last week.

 For an IBB short trade, this is about as great an entry as you can ask for, the risk is extremely low here relative too the profit potential as a stop can be placed above recent highs, although I prefer something a bit less obvious and with a little more room at least initially.

If you went the leveraged inverse (short) ETF, BIS 2x short NDX Biotechs...

Then the same would apply, as far as a long, you couldn't ask for much of a better discount and you are very close to a natural stop, although once again, I would not put it at obvious areas and for an initial entry, I'd prefer to take a few less shares and have a wider stop as you can always add to the trade, but you can't kA e back that stop that was just a little too tight to give the trade room to work on a reversal from all time highs.