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Getting more cautious on biotechs

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I'm starting to see some biotech stocks begin violating their bullish support trends and some others getting close to violating these longer-term support trends. Last week we took a look at the Biotech Index (BTK.X) and felt a break below the $530 level could be trouble for bullish traders in the group. The BTK.X did muster a rally yesterday, but I'm monitoring some stocks that one by one may spell trouble.

Today, shares of Myriad Genetics (NASDAQ:MYGN) broke below its bullish support trend and gave a double-bottom sell signal at $45. Now I'm eyeballing shares of Genzyme Corporation (NASDAQ:GENZ) getting very close to breaking its bullish support trend and giving a triple-bottom sell signal.

Genzyme Corporation (GENZ) - $1 box

I don't think shorting/putting the biotechs is going to be a piece of cake for bears, but there are some negatives starting to develop in the group. Right now, shares of Genzyme (GENZ) are trading right on their 200-day MA of $53 and right on top of bullish support trend. A break below the $52 level could see the stock drop quickly to the $51-$50 level. If there's some type of "bad news" in the wings then the stock may be vulnerable to dropping right back into a base formed in October near $47.

For the BTK.X to break below its bullish support trend, you and I both know some biotech stocks have to also break down. With shares of Myriad Genetics (NASDAQ:MYGN) breaking its bullish support, a bearish trader may want to keep an eye on that stock and if she continues to weaken, then look to play shares of GENZ short/put on a break at $52.

I prefer to buy puts on biotech stocks and not short them outright. It's a personal preference in that I just don't like to take the risk that the biotech I'm short might announce some type of major breakthrough for the treatment of cancer or some other type of ailment. A trader/investor can limit their risk with a put option.

High Pole and Low Pole Warnings

In the Genzyme chart, I've highlighted a "high pole" warning. One subscriber asked for a definition of the high/low pole warnings or what they mean.

What we look for in supply/demand analysis is a major reversal or shift in supply/demand. By themselves they don't necessarily mean a lot, but we identify them as an ALERT to a potential change/shift in supply/demand. It's when a high pole warning is followed by a major break in trend or glaring sell signal that the "high pole" warning begins to have more credence and a trader that has identified the pole may have more conviction in their trading.

Conversely, the "low pole" warning gives hint that demand may be starting to outstrip supply and a stock may have achieved its bottom. Then, a bullish trader may have more conviction in bullish trades on breaks of triple-tops or breaks of downward trend to the upside.

Jeff Bailey
Senior Market Technician
Option Investor

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