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Biotech Index may have been the swing vote

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Not long ago, it was the state of Florida that cast the swing vote for the Presidential election. Today it looks like the Biotechnology Index (BTK.X) may have cast a vote that is going to put a short-term damper on the NASDAQ's rally.

Biotechnology Index Chart - last 6 months

Yesterday the Biotechnology Index (BTK.X) traded in a very tight range between 533.62 and 525.48. This morning this index did show a bit of strength, but I got the feeling the votes were still being counted. Earlier in today's session, the BTK.X did break below yesterday's low and that seemed to put a bit of a lid on the NASDAQ rally. In the past hour, the BTK.X broke below a recent relative low of 523.26 found on 07/30 and that seems to have traders stepping up their profit taking in other parts of the market. I think traders can get a good feel for things going forward as to what the BTK.X does from here. If we see an aggressive downward move, then I get the feeling the NASDAQ and the QQQ could have a fairly sharp pullback to the $41 level. If the BTK.X were to show some strength over the next couple of sessions and not give back the 494 level, then that would tell me that sellers are few in the sector and perhaps the broader NASDAQ. The reason I make the tie to the NASDAQ is that the BTK.X looks technically vulnerable here and I would think aggressive bears would be in this group. Smart money doesn't short strong technicals, it shorts weak technicals. If the bears leave the biotech sector alone, then they'll probably be less likely to be shorting some other indexes that are showing strength.

At this point, investors and traders that have managed to stick around for the past year have seen rallies fade into the dark. Right now I think we're in the early stages of "round 1" in a two round fight. There's going to be some jockeying for position in some stocks. Those stocks that are rather thinly traded are going to be most volatile. Try to avoid some of those thinly traded stocks at this point as it is very easy to get shaken around.

Last week I took some heat from subscribers as they felt I was too bullish. I think that came from my profiling some bullish option trades in the QQQ with September expiration. The QQQ did rally to a level of retracement that we had set as our first real test at $43.67. I felt a week ago that we needed to look at the markets internals and bullish percent to assess the trade further. With the NASDAQ-100 bullish percent ($BPNDX) now up at the 48% level, we're yet to be in "bull confirmed" status and still in bull alert status. The S&P 500 bullish percent ($BPSPX) did reverse back into "bull confirmed" status with yesterday's action. The bullish percent for the S&P-100 ($BPOEX) is also back in "bull confirmed" status at 44%. Since this is the case, I can't be too bearish at current levels. It looks like things are just getting started.

Expect some minor setbacks, but be willing to buy some strong stocks in upward trends if they pull back to their breakout point or upward trend. Try not to mess around with stocks that are in downward trend where you're trying to find a bounce. You can waist a lot of time and money in those stocks as a broader market rally leaves you behind.

Jeff Bailey
Senior Market Technician

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