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Yesterday's biotech bounce, could turn into biotech trounce

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Traders may want to watch the close very closely on the Biotech Index (BTK.X) today. If this index were to close below our long- term upward trend that could be trouble for bullish traders in this group tomorrow morning. Late yesterday and then again this morning we felt this index might be a good place for bearish traders to focus and so far the bears haven't been disappointed. Complacency (bullish or bearish) is not an option for traders in this group and trades need to be monitored closely. Yesterday's turn around after the Fed interest rate cut should be proof enough.

Biotechnology Index Chart - 60-minute interval.

Ideally, bearish traders would like to see this index close below our upward trend, something this index has yet to do since the "anchor point" for upward trend dating back to April 14, 2000 If YOUR trading discipline (as outlined in your plan) is to end every trading session flat (no open positions) DO NOT deviate from your plan! Earlier this morning we did note that this index was not among our sector leaders to the downside, but as the session progresses it is starting to challenge for a spot in the top five.

We're seeing some rotation

Some groups that didn't participate in yesterday's broad market rally are trading lower today. We gave traders an idea yesterday that they might want to have a "window" open that tracks the major indexes and can give them a quick view of what's moving and what isn't. Today's movers to the downside are among those that didn't participate yesterday and that spells of rotation taking place.

Jeff Bailey
Staff Analyst

California power woes

With the demand for electricity outpacing supply, California regulators are considering a temporary electricity rate hike of 9% for residential customers and up to 15% for large businesses for the next ninety days. Nevertheless, the two largest utility companies in California claim the increase is not what they need to remain solvent. PG&E and Southern California Edison wanted increases of 26% and 30% respectively. Both utilities have rung up billions of dollars in debt to buy power on the open market at prices that are above what they are allowed to charge under California's deregulation plan. Many analysts have stated that both companies are a combined $10 billion in debt, or a $1,200 obligation owed by each California household. Both sides were condemning the proposal for opposite reasons. Consumer groups expressed their dissatisfaction of rate increases, by stating the whole point of deregulation "was to pay less". Edison said in a statement that the proposal granted an interim and inadequate rate increase that is wholly disproportionate to the actual cost of wholesale power. PG&E warned that it could run out of cash and natural gas in February because the 20 companies it buys power from won't sell to the utility if it doesn't have cash on hand. The company also announced it borrows on average $24 million a day to pay for the power it needs to deliver to customers. Bankruptcy might be looming for both companies with many analysts stating the chance of bankruptcy at 50/50. If a rate increase is not implemented, it is very likely both companies will not restore its creditworthiness. Shares of Edison International (EIX) fell $2.75, while shares of PG&E (PCG) shed $2.56 on Wednesday. Both stocks closed at 52-week lows.

Edison International Chart - last five months.

Since mid-September, shares of EIX have dropped from $25 a share to $9.50. Yesterday, shares of EIX broke our horizontal support to the downside and closed at $12.25. This morning EIX gapped down and is currently trading at $9.50. MACD is below the zero line and trending lower.

PG&E Chart - last five months.

If we did not label the two above chart, traders could have stated the above charts were the same company. PG&E has fallen from $32.50 in early September to $12.88 in today's trading. MACD is below the zero line and trending lower.

Jason Castro
Assistant Analyst

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