Earlier today we pointed out that the Biotech Index (BTK.X) had violated its bullish support to the downside and now we see a rather alarming sell signal taking place in shares of biotech Genzyme (NASDAQ:GENZ) at the $52 level. Much like the sector itself, the trade at $52 has trend turning bearish and that triple-bottom sell signal may have bears licking their chops.
Genzyme Chart - $1 box
According to Dorsey/Wright and Associates, the biotech sector is currently "bull confirmed at 55%, but a decline to 54% would have the group in "bull correction" status. We continue to see some rather alarming sell signals take place in this group today and my guess is that tonight's reading will have the group in a bull correction status. What sector bulls need to be careful of is that a "bear" reading may not be found until a sector bullish percent reading of 6%. In late September, the biotech bullish percent reached a low level of 8% before reversing higher.
In "bear market" condition, the triple bottom like we see in Genzyme (NASDAQ:GENZ) is profitable for a bearish trader 93.5% of the time, for an average gain of 23% over the course of 3.4 months on average. This data is according to a study by Professor Earl Davis at Purdue University.
Option traders should try and use Professor Davis' study and time tables to help understand option selection and time horizon. If you're buying Friday expiration and looking for a 23% decline, you may have unrealistic expectations as it relates to the probabilities. Just "knowing" what option strike to buy isn't enough for successful options trading. Time is the other part of the equation that most unsuccessful option traders forget or do not know how to begin ascertaining. The point and figure charting system helps address that dilemma. You can also study the chart of GENZ and other point and figure charts to better understand the time it may take for a trade to unfold in your favor, based on past technicals.