A downside alert at a long-term support trend was recently triggered on the Biotech Index (BTK.X) and traders should be alert here. We've added a level of confirmation to our chart of the BTK.X and this activity may be troublesome to the NASDAQ Composite. Some of our indicators indicate that this group is "oversold", but we'd be very cautious in any bullish trades for this index with the technicals starting to break down.
Biotechnology Index Chart - last eleven months.
The BTK.X broke a long-term upward trend this morning and now looks to be setting up a "bearish triangle" formation. OK for traders to be buying some puts and shorting stocks in this index here with half positions. Look for a break of our "confirmation" level below 550 to round out to a full position. Shorter-term traders can short full positions here with 550 being a target. MACD is below the zero level and turning lower.
Watch the VIX!
Hopefully traders haven't forgotten about the Market Volatility Index (VIX.X). Yesterday this Index surged as put buyers aggressively looked to hedge positions and speculators bought put contracts. This indicator gives hint that the market is nervous once again and may act "irrational".
Market Volatility Index Chart - last five months.
The VIX is back on trend and that's higher. This should be perceived as a short-term negative for stocks as put buying creates a bearish trade. We've added a horizontal blue line to our chart that will serve as a "water line". When the VIX is trading above this line at 32, we would say that the market is implementing more bearish trades in the way of put buying. We've talked about this index and historical importance to market events and suggest new subscribers review our archive section of intra-day updates to bring themselves up to speed.
Relationships currently "in play"
Traders that don't have a disciplined system of keeping a log of observations often find themselves losing track of scenarios/relationships/observations that are in play. Here's a quick list of what seems to be some of the key indices traders should be monitoring.
The relationship between treasury yields (TYX.X) and the Gold/Silver Index (XAU.X). When yields go lower and the XAU.X moves higher it has spelled trouble for stocks.
Market Volatility Index Chart (VIX.X). The VIX is back on an upward trend and indicates the market is nervous and buying puts. This is important as an option trader (CBOE) may have to take a short position in the underlying security to hedge the put they just sold. Remember that the seller of a put is OBLIGATED to buy the security if he/she is exercised!
Biotechnology Index is breaking a long-term upward trend and this could indicate that market participants are starting to "throw in the towel" on another group of high-valuation stocks where bets were made on new discoveries and not necessarily on "strong" current fundamentals.