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Biotech Retracement Bracket

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This morning Jeff Bailey fit a retracement bracket to the S&P 100 Index (OEX.X) to a "level within a level" to get a better idea of where short-term support and resistance levels may be. I'm going to shamelessly steal from him and do the same thing with the Biotechnology (BTK.X) index.

Biotechnology Index Chart - daily

As you can see the retracement bracket based on the April 2000 low and the September 2000 high doesn't help a short-term trader identify potential risk reward levels very well. Fitting a retracement bracket to the February 16, 2000 high of 628, and looking at a 60-minute chart gives us a better perspective of where some near-term resistance levels lie.

Biotechnology Index Chart - 60-minute interval

The 60-minute chart shows that we are currently approaching a short-term resistance level at 476 (the 38.2% bracket and 1/8/01 low). You may say that is all fine and dandy, but the bracket still doesn't give me a support level. That is true. The retracement bracket is just one tool in the technical toolbox. In this situation I would break out one of two technical tools. The first is the gap that formed at the open today, 447. A lower risk support point would be the 50-period moving average at 460. Either one of these should represent a support level in the 447- 460 level depending on your risk. With BTK currently trading around 469, 9-22 points is a decent amount of "heat" to take on a long play with a potential gain of 8 (the 38.2% retracement bracket). I would like to see prices come back a little to improve my risk\reward, or if prices can close above the 476 level (38.2% retracement bracket), we'll have a new level of short-term support and some lower risk.

Jeff Canavan
Assistant Analyst

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