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Early analysis of today's "rally"

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I currently don't like what I'm seeing for equity bulls to be jumping the gun and trying to get long. With some of our bullish percent data turning bearish and more cautious, I think this morning's rally will be rather brief and may not necessarily find any type of prolonged upside.

The biotech sector is breaking down further today and trades at the $530 level in the Biotech Index (BTK.X) have this index now following a triple-bottom sell signal with a spread-triple bottom sell signal. These are very bearish supply/demand signals that tell us supply is in control.

Biotech Index Chart - $10 box

With a current bearish vertical count and recent sell signals, bulls need to be playing defense in this sector. In recent days, we've been profiling some short/put plays in this sector. Many are performing well today (see January 15th intraday commentary).

NASDAQ-100 Trust (QQQ) Chart - $1 box

With our internal indicators (the bullish percent) signaling caution, we turn to the QQQ point and figure chart. The first sign of trouble for the bulls is a trade at $38, while trouble for the bears comes at $43. I've marked some points on the above chart to give subscribers some price reference as to what was taking place between the NASDAQ-100 bullish percent and the S&P 500 bullish percent. As you can see, once the NASDAQ-100 and S&P 500 bullish percents were turning toward bearish in UNISON, the brief rally in June (red 6) didn't last and the downward move was underway. Will history repeat itself?

At that time (June) we were also alerting traders and investors to the buying in bonds and lower YIELD action. We've seen similar action in recent days with buying in Treasuries. Therefore I am very cautious toward bullish equity trades at this time and any bullish trading is short-term oriented with tight stops.

We have outlines several bearish trades in recent sessions. I just don't want some of our newer subscribers trying to buy a bunch of calls and have them blow their accounts up.

Jeff Bailey
Senior Market Technician
Option Investor

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