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Breakout In the Biotechs Likely To Occur Soon

I'm still awaiting a resolution from the symmetrical triangle formations on the biotech ETFs which I first posted just over a week ago. Prices are now in the typical proximity range before the apex of the triangles in which an upside or downside break is likely to occur & so I would expect an upside or downside breakout of these patterns to occur most likely within the next couple of weeks. Until we get a clear resolution of these patterns (on most, not just one of the biotech ETFs), trading the sector is likely to be very difficult as prices chop around within an increasingly narrowing sideways trading range. Note the false breakout in IBB today which could have near-term bearish implications on the biotechs as false breakouts are typically followed by a swift reaction in the opposite direction.

 

Of the 3 main biotech ETFs that I closely monitor, XBI has what I would consider the most "healthy"long-term (weekly) chart. However, should prices break below the primary uptrend line & 2014 reaction high, it would most likely signal that a new primary bear market is underway in the sector. Although PBE has already more than fulfilled my minimum downside target back in August, I still favor another thrust down to AT LEAST revisit the yellow primary uptrend line once more. Unlike PBE & XBI, IBB is trading solidly below its primary bull market uptrend line & appears to be flagging (i.e.- a continuation pattern). With prices reversing just shy of my 278 target in the previous plunge, I'm still expected that level to be hit in the coming weeks/months.

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Nov 19, 2015 3:03pm|Categories: Equity Market Analysis|Tags: , , |5 Comments

5 Comments

  1. astoria26 November 19, 2015 3:49 pm at 3:49 pm

    Thanks for your analysis, Randy! Regarding the IBB false breakout, is there a strategy to not getting suckered into them? How do we tell if its a true breakthrough vs. just a head fake? I saw that yesterday and thought the biotechs were ready to rally, but that’s clearly not the case today.

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  2. rsotc November 21, 2015 12:26 pm at 12:26 pm

    @astoria26 – I missed this question earlier. Assuming the breakout is confirmed (more on that below) there’s really no way to know if a breakout is going to fail until after it does. In order to increase the odds that a breakout will stick, a couple of things that look for are 1) above average volume on the breakout (150%+ avg. vol.) and 2) a close above the pattern based on the time frame of the chart that I’m tracking it on. E.g.- This was a 2-hour (120-min) chart of IBB although in this case, we did get one 2-hour candlestick close above the pattern & the volume that day was 2.6mm vs a 90-day avg of 2.7mm (i.e.- below average, a non-confirmation of the breakout).

    There’s really no way to identify with certainty which breakouts will fail & which breakouts, even if they are not confirmed by volume, will stick. The important thing is to realize that failed bullish breakouts (bull traps) are often followed by a sharp move lower & vice-versa with failed bearish breakdowns (bear traps), in which case you can either cut your losses, if you took it, or profit from a failed breakout by taking the other side of the trade once you see that it has failed (assuming that other technicals & variables confirm).

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  3. astoria26 November 23, 2015 2:24 pm at 2:24 pm

    When you say “2) a close above the pattern”, do you mean above the pattern of the downward trend from summer highs? This is great info, thanks for your thoughts!

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  4. rsotc November 23, 2015 3:36 pm at 3:36 pm

    astoria26- I was replying generically (to any breakout above a chart pattern) in response to your question “How do we tell if its a true breakout vs. just a head fake” although that reply would hold true to the symmetrical triangle patterns on the various biotech ETFs in place at this time.
    By “…2) a close above the pattern based on the time frame of the chart that I’m tracking it on.”, I mean that if it happens to be a 120-minute chart, such as the case with these biotech etf patterns, then I like to see a 120-minute candlestick print a solid close above the pattern & to be more specific with the biotech example, I want to see not only one but a least 2 or 3 of the biotech sector ETFs breakout & print a closing candlestick above their respective patterns. Hope that helps but let me know if you have any other questions.

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  5. astoria26 November 23, 2015 3:42 pm at 3:42 pm

    Gotcha, thanks!

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