In yesterday's market monitor, Eric Utley got this scratch that seemed to need scratching and thought the biotech sector may be ready for a bounce and finding a bottom. Well, I (Jeff Bailey) have never been one to argue with Eric, but I'm going to try and double check his thinking. Here are some of the things I'm looking at from the point and figure perspective. If you signed up for the annual renewal special, get those workbooks out and lets review some things. Since we thought a 1/2 bullish position would be a place to start in the Biotech HOLDRS (BBH) lets start there.
Biotech HOLDRS (BBH) - $2 box
The first thing I like to do is look for the "first sell signal off the top" and see what that bearish vertical count came to. On the above chart (in pink) we see a column of O's that indicated a potential bearish price objective of $114. Eventually, that bearish count was negated by the "buy signal" (column of X exceeded a previous column of X) at $136, but the then resulting sell signal at $126 and triple-bottom sell signal put the BBH back in the bearish mode. The current vertical count is bearish to $110 and that's very close to yesterday's low of $111.68.
In essence, a bullish trader might think that the point/figure chart was "saying" back in December and January that the BBH was headed to a range of $110-$114. Hmmmm.... maybe Eric is onto something!
I'm also looking at the triple-bottom sell signal and break of bullish trend at $126. If we look at Professor Earl Davis' study of probabilities, we see under bear market condition, the triple- bottom sell is profitable for a bearish trader 93.5% of the time, for an average gain (for the bearish trader) of 23% and takes and average 3.4 months to be achieved. Let's see... 23% of $126, that's $97.02. Ugh! 1/2 position bullish, stop under the low and follow the trade with a stop should it progress in our favor.
Biotech HOLDRS Chart - Daily Interval
The point and figure charts are great for helping assess risk, but traders also like the bar charts and tools that it has for setting up trading scenarios. The UPWARD trend from the March 2001 lows are still in place so I don't have a problem with a bullish trade. Retracement that we've had in place for some time shows the 61.8% retracment at $110 and that ties in rather nicely with the bearish vertical count from the point and figure chart. Yesterday's low really ties in nicely with our downward trending regression. I'd have to concur with a 1/2 position at this time and longer-term bulls could follow that trade with a stop just under the $110 level. Just in case the probabilities were to happen from professor Davis' study and we were to see a 23% decline from that triple-bottom at $126.