DNA and the Stock Market

Since I'm a creature of genetics (and since Carl C asked me to), I'm going to look at the Biomedics/Genetics sector today. But first, let's see what's happening in the market by taking a look at the Industry Bell Curve.



This is more like it. This is almost normal! I'm not saying that means that the market is back to normal; all I'm saying is that it's acting more normal. Time will tell if we've arrived at a bottom. I tend to side with two gents whom I respect very much, John J. Murphy, the chief technical analyst for StockCharts.com, and Dr. Marvin Appel, author of "Investing with Exchange-Traded Funds Made Easy". They think the S&P 500 will retest its low of 750. Here's a 10-year chart of SPX:



Murphy points out that the S&P is now testing the lows of 2002. "There are two ways to view it," he says. "This could be a huge trading range that began eight years ago. If that's the case the market will stabilize in this area." The other view - if the S&P breaks through its 2002 lows, is not so rosy: "[T]he entire eight-year pattern is nothing more than a huge double-top pattern -- which is very negative. We're kind of hoping that doesn't happen."

"Kind of hoping" -- I wonder if he's also playing the short side! :)

Appel thinks the retest will come in 2009 when other sectors are influenced by the current credit crisis. But back to the sector at hand.



The first thing I notice about the Biomedics/Genetics BPI chart is that the last time there were this many column changes was back in 2002. The purple boxes to the right also show us that the majority of the moves this year occurred from September onward. We've got two successive double tops (Oct-Nov and Nov-Dec). These point and figure buy signals are significant on a P&F chart for a specific securtiy, but on a BPI chart they don't mean so much. What's more important is the level (it's at 30%) and whether it's in a column of X's or O's (because of the 6% reversal rule).

We know from our ETFMT Buy / Sell Status list that this sector is on a Relative Strength Buy signal, so we can make a long-term play or consider trading. Let's look at the peer performance chart of the Sector Alert picks from the November 21st 10% alert:



A couple of preliminary things:

(1) The order is XBI, IBB, BBH, IMCL, SQNM, EBS, NYSE, and SPX.

(2) I've included SPX & NYSE as references. In this case the SPX is the baseline for comparison. (See the grayed out box up top? That means it's selected as the baseline. The arrow at the bottom right shows us that it's at 0%.)

(3) This is the 180-day chart. The 92-day chart is below (for some reason, I couldn't pull up a 90-day chart; I'm guessing it's a scaling issue and the comparisons were too great).



We can see that BBH is the consistent leader in ETFs. Sequenom and and Emergent BioSol, if you scroll through the time periods, are jockeying for top position. But we're going to restrict our discussion to the ETFs. So why did Sector Hunter place BBH third in the list?

Here's some info on each of the holdings (with links so you can see for yourselves):

XBI = SPDR S&P Biotech Fund of 21 stocks. Top Ten make up over 55% of total holdings (Top Five (29.32%): Gilead Sciences - 5.99% , Cephalon - 5.98%, PDL BioPharma - 5.95%, Amgen - 5.75%, and Myriad Genetics - 5.65%)
http://quicktake.morningstar.com/fundnet/Holdings.aspx?Country=USA&Symbol=XBI&fdtab=portfolio

IBB = Nasdaq Biotechnology Index Fund of 139 stocks. Top Five make up over 42% of total holdings (Amgen - 13.12%, Gilead Sciences - 10.80%, Celgene - 7.41% , Teva - 6.31%, and Genzyme - 4.39%)
http://us.ishares.com/product_info/fund/holdings/IBB.htm

BBH = Biotech HOLDRS Fund of 14 stocks. Genentech makes up 42% of the fund (remember Teeka in the DVDs?), Amgen 22.5%, Gilead Sciences 16.8%, Biolgen Idec 7%, and Genzyme 5.7%.
http://www.etfinvestmentoutlook.com/etf_holdings.php?s=BBH

Ah-ha! Elimination by nondiversification. So we're back to the Sector Hunter first choice, XBI. Let's have a look-see!



XBI is looking decent. It recently rose as high as its resistance in the October and November rallies (in the $54-56 range). If it can break through, it could resume its previous uptrend. If it doesn't, there's a pretty good chance that it will test its most recent support level at $50. A drop below $50 would not be the end, however, since it's found previous support at each step from $46 to $48.

A column of O's to $50 and a subsequent reversal to X's would continue the Bullish Support Line established in November. As such, this could also prove to be an excellent candidate for the Bull Line Trade.

But how accurate was the 10% CASH alert? Looking at the stochastics in view of the November 21st alert:



We can see that the alert called a perfect entry point. Once the signal was given, the stochastic method would have led us into a position that was the lowest price for XBI since 2006. (This is a one-year chart, but look at a longer term chart yourself; you'll see that the ETF hasn't been this low since August 2006.)

That's it for now. Y'all have a happy (and safe) holiday, and may your new year brim with success.

o<|B-D Bobby D

Collecting One's Wits

We've seen a LOT of CASH alerts since ETFMT went online in the new edition. Obviously we can't take a position every time an alert hits our inbox; we have to pick and choose what will constitute an actionable alert. Because of the unexpected nature of this market, the sheer number of CASH alerts has made me more cautious than I might have been (1) had we been hit with a reasonable amount of alerts and (2) had we been in a market uninfluenced by intervention, sentiment, and extreme dysfunction.

So, as you might have gleaned from my posts to the Community, I decided to ignore the 30% alerts and watch the 10% and 70% alerts. When every sector hit the 10% category (see post below), it was unprecedented. I started paying more attention to the 70% alerts, since they were fewer and farther between (only five of them since June).

Today I'm going to see how the last two 70% alerts panned out. And I'll share a success story at the end.

Let's go backwards from the most recent alert, for Gas Utilities. Here's the P&F from Investors Intelligence:



We can see that in November it took a nose dive, breaking through at least three previous support levels before stopping at yet another support level (light green bars). Let's look at the line graph to find when this fall was initiated:



The red arrow points to the position of the stock on November 10th, the date of the CASH alert. Note how the MACD registered a sell signal right before and how the RSI fell afterwards. The BPI fell from 62.5% on the 10th to a low of 17% on the 21st.

But this is just the BPI. Let's look at the perf chart of the recommended actionable ETFs and stocks:



PXI is the biggest loser of the two ETFs, with Atlas Pipeline barely nosing ahead of DCP Midstream for worst performance of the three stocks. Here's PXI:



PXI closed at $21.70 on the 10th (on excessively high volume). By the 20th it had reached a low of $16 and closed at $20.46 as of the time of this writing.

Here's APL:



APL closed at $15.28 on the 10th and went as low as $6 on the 21st and closed at $7.24 as of the date of this post, still down by almost half.

Turning to the CASH alert for Steel & Iron from November 6th, here's the BPI:



Whew! After broaching the 70% threshold it plunged. Here's the line chart with the 6th marked (the intersection of the two gray lines):



In this instance, the MACD sell signal came after the CASH alert, and the RSI didn't cross below 50 until the 12th.

Here's the perf chart for the alert plays:



To cut to the chase, SLX closed at $31.15 on the 6th and went as low as $20.23 on the 20th. It closed at $28.21 on November 26 - still a 10% gain if you shorted and held it past the 20th.



AKS closed at $10.82 on the 6th and went as low as $5.22 on the 20th. As of November 26, it closed at $8.60 a 20% gain if you waited till then to cover your short play.



Obviously, the earnings would have been greater had we covered when the security was at its nadir, but I wanted to show that decent returns are possible even if you miss the bottom.

I didn't make a play on the steel & iron sector (see below for an earlier analysis), but I did buy put options on DPM on November 13th (currently they're up by about 38%). Earlier this year, after the September 26th 70% Insurance alert, I also bought put options on XL (April 20), on September 30th. On November 11th, I sold them for a 111% profit. Here's the chart for XL:



The day I bought the options is circled in green, the day I sold them in red. If I had sold them on the 9th of October or waited a bit longer, I'd have made more. But, with a 111% profit, do you think I'm whining about what I could have made? No way, Jose!

Find the strategy that works for you in this market and stay disciplined. Teeka's given us the tools to find our way, but it's up to us to devote ourselves to becoming Master Traders.

Oh, and have SUPER Turkey Day!

gobble gobble

Ride a Painted Pony, Let the Spinning Wheel Glide

Another remarkable sight: Every sector on a Bull Alert! Things keep getting crazier.

Let’s look at the NYSE BPI, which is currently in a column of X’s.


I’ve identified the support levels in green and the resistance levels in red. We’ve recently arrived at the most recent support level at 26%. There's definite resistance at 42% but the Bearish Resistance Line would be hit well before that, at about 39 or 40%. (There was resistance in 1999 that turned into support at 40-42% in 2000-2002 and then again became resistance. Prior resistance at 50-52% turned into support in 2004-2005.) Will we continue the upward trend or flip and test the previous support at 24%? I'm not sure, but there might be a clue in the Percentage-of-Stocks-above-their-Ten-Week-Moving-Average BPI.



You can see that it too is in a column of X's. The 10-week moving average is a short-term leading indicator and as such tends to foreshadow what happens in the 30% BPI (currently in O's) and the Bull Trends BPI. It would be unwise, however, to put too much faith in the 10% BPI.

So where do we turn?

Here's the S&P 500 chart:



As we can see, it mirrors the NYSE BPI in many ways (and its 10% and 30% charts are also similar, even though it's made up of 1/6 as many stocks as the NYSE). In fact, most of the indices are looking a lot alike right now, with slight exceptions (the 30% BPI of the Wilshire 5000, for example, is, in contrast to the others, in a column of X's).

The last column of X's in the S&P 500 BPI surpassed both recent and long-term support levels and stopped at a level of slight resistance from February of this year. The next resistance level is at 48-50%, where prior support turned to resistance in April and August 2008. But again the Bearish Resistance Line would be reached before that. As there are too many support levels that the index could conceivably fall back to (14%, 18%,26%, 30%) -- or it could dip below 10% again -- we have to be ready for anything.

So there's no magic eight ball to tell us what's going to happen next, much less what we are supposed to do.

But we already knew that, right?

Now is the time to be compiling our Watch List. The election may or may not have a large or immediate impact on the markets. Regardless, when the market makes a clear move to either form a bottom or continue the trend downward, it will be more than likely the opportunity of a lifetime.

An Historic Occasion

Wow. I stand here with jaw dropped and eyes wide open -- really wide. This is Thursday's (October 9th's) Industry Bell Curve. 46 out of 46 sectors tracked are in the 10% column. Astounding.

And have you ever seen anything like this NYSE chart?



Now I can imagine that this seems like a scary, unpredictable, treacherous situation to be in in the market. I can understand that the fight or flight syndrome meter is leaning way over towards the "flight" reaction. But what I see is not pending doom, but pending opportunity.

In such an oversold market, there are bound to be exceptional opportunities to buy into some very undervalued securities. Now is the time to bring out the watchlist you've been making, to revisit those picks you'd set aside for "the right time" -- it's almost upon us.

I'm not saying to go out now and take positions in every sector that's hit 10%. That would be chancy. The signals we're receiving have to be taken in context of the overall market. And the overall market is a bit unpredictable at the moment, what with the subprime debacle, the credit crisis, the bailouts -- oh, the bailouts -- and the global rush of fear.



Above is the NYSE BPI. Notice that, after a brief flirt with 40%, the index plummeted past its recent support level.

"With all this turmoil, should I give up and get out?" NO! We are in a prime position to follow Teeka's advice to let the game come to us. Opportunity is in the wings, waiting to make an entrance. When it does, for those in the game, it will be an historic occasion.

Steel & Iron Update

Above is a copy of the Investors Intelligence Steel & Iron Sector BPI as of September 30th. I've marked the resistance levels (purple) and the support levels (green). It's broken past its previous resistance at 8% and achieved a new low of 6%. This sector has made 24 (count 'em - TWENTY-FOUR!) column changes so far this year. In 2007 it make 16. So it's been very volatile.

The one interesting thing I've pointed out (blue circles) is that when there is a slight upturn during a downtrend, it is usually followed by a severe drop (July and December 2007, June 2008) or a rally (July and September 2008). With this kind of volatility, I would definitely wait until I saw a significant move upward of at least four boxes (8%).

Now let's look at SLX.



Boy, what a difference a month makes, eh?

It broke through that support level at $75 we identified last update (see below), to hit its lowest level since early 2007. Notice how it found temporary support at $65 like it did in November 2007. It was a similar pattern in reverse: it found resistance at $68 and plummeted, resisted, and plummeted again.

This ETF is even more volatile than its sector, making 47 (that's not a typo) column changes so far this year (compared to 35 for 2007).



With the RSI creeping along near its historical low and the MACD at its lowest point over the last couple of years (and apparently edging lower below the zero mark), I would wait before pulling the trigger on this one. It's tempting since it's near its two-year low. If you must make a play here I would wait until the reversal in the sector BPI and then buy SLX.

I would be remiss, however, if I did not point out that, according to the perf chart of the securities from the CASH alert, SLX was the worst relative performer at 180 days, 90 days, 60 days and 30 days. A better bet might be HSVLY. Let's look.



Now that's more like it! If you can handle a little bit of a rough and tumble ride, this security looks like it would be a good candidate for range trading.



This is a daily candlestick chart for a year. If you go out two years you'll see the trend of the security is upward. I kept it at a year so we could look more closely at the tell-tale signs.

The red vertical lines show each time the RSI rose above 50 - even if it had just dipped below briefly. The RSI in this case was a perfect predictor of when this stock would go higher. The MACD was also very dependable here (green circles for crossover, gray for crossunder). We also see a negative divergence in the MACD from mid-March to June of this year (blue lines).

Though not optionable, the stock is currently trading at around $17. I think this is a very attractive candidate for purchase when the RSI once again broaches the 50 line.

A Look at GDX

GDX is only one of the Gold ETFs, although I've found that it reflects the Investors Intelligence Precious Metals constituent list for gold rather well. There's also DGL, GLD, IAU. These three recently broke through their Bullish Support Lines. As for GDX, it looks like it's nearly reached its support level at $32 (green lines on the chart - established back in June through October of 2006). It had previous support at around $42 late 2007 through May of this year. I would wait to see if it will again find support at the $32 level or violate that support.

I highlighted past resistance in purple to show how previous resistance becomes new support (except for the July 2008 high at $52). Notice the quadruple top in early 2007.

SLX Update

Well, SLX has reached an important support level at around $75. In fact, a little over a year ago, in July 2007, we saw some resistance around the same level. (Proving Chris' aphorism: "Previous resistance becomes new support and vice versa.")

We had a negative divergence from the MACD at the end of last year (blue lines over MACD and above the period marked "Consolidation Phase") and in March through May of this year we saw the MACD edge up slowly while the price of the security went from $90 to $115, before the MACD sell signal occurred. In March when we saw the same signal, it was a burp as the ETF trended higher, but this time it crossed the zero line and kept going.

Now I know we don't usually pay attention to volume, but notice how the last downtrend caused a tremendous increase in volume. Maybe buyers bought in expecting another turn up, or maybe they anticipated a deeper move down.

Regardless, everybody's going to be watching to see if SLX breaks through old support or rebounds.

The Steel/Iron BP chart recently changed columns, from Os to Xs, after hitting the 12% mark. Both BPI charts reflecting the percentage of stocks above their 10- and 30-week moving averages are in columns of Xs. And, according to the Sector Hunter calculation (whatever they may be!), the sector is on a Relative Strength Buy Signal.

SLX shares 46.9% of the same constituents as those on which the Investors Intelligence BPI for the sector is based.

Precious Metals Update

If you bought into precious metals in May (on the first crossover) or in June (on the second crossover), you probably aren't a happy camper, since the recent drop to the 6% BPI level -- its lowest ever on the available chart. Remember, however, that this is a long-term buy signal. Even though one can never tell how long we could stay in oversold territory, you might consider entering a position upon a reversal back to a column of Xs. To reiterate my observation below, "it's rebounded to above 60% every time, between THREE AND EIGHT MONTHS after the low."

Precious Metals were up in May, down in June, up AND down in July. The Precious Metals BPI got close to the 18% low in July 2007, but not as low as in 2004 and 2005 (6% & 12%, respectively), so even though it may recede even more to the 10% BPI level, it looks like that, once it's broached the 20% mark, it's rebounded to above 60% every time, between 3 and 8 months after the low.

01 August 2008 SLX

Gerald,
Steel appears to be a volatile sector. The move you refer to in the sector BPI from 60% to 18% all happened in July 2008! The same is true for the reversal from $100 to $81 in SLX -- it all happened last month. For SLX previous support seems to be at $75 and it found new support in March at $81 (on the BPI). This is precarious at best since it was violated in late March and hasn't been tested again till now. Although the BPI and the 30% wk ma charts are in columns of Xs, the 10% wk ma chart, which suggests shorter term trends, is in a column of Os. So even though the sector is on a Sector Hunter RS Buy signal for the long-term, SLX will probably see some continued volatility, starting to the downside. Having said that, the MACD looks like it's reversing to the upside and the reduced volume on the recent downtrend suggests that there isn't necessarily support for the trend.

I might set my stop loss (is that one word or two?!?) at $81 for the first lot (@ $84.45) and at $87 for the second lot (@90.70), since it found brief support there earlier. This would be in line with Teeka's three-box policy.