Yesterday in the market monitor I got a little bullish in the biotechs with a trade in the Biotech HOLDRS (BBH). Here's some things I'm looking at and perhaps some techniques that traders can use for other stocks/sectors they're thinking of trading in the future.
Biotech Index (BTK.X) 502 +1.13% never traded in negative territory yesterday, but it did peg the close at a session high. My "key stock" is Amgen (NASDAQ:AMGN) $59.78 +1.4% had a good day yesterday and this is something I wanted to see in order to move off the proverbial bar stool and onto the dance floor.
The Biotech HOLDDRS (AMEX:BBH) trade very similar to the Biotech Index (BTK.X). I'm going to transition to the technicals there. Here are the pieces of the puzzle that will eventually create the entire trading scenario. There's a couple of pieces missing right now, but I will lay out what bulls want to look for going forward.
Relative Strength Chart of Biotech vs. S&P 500
In late September (red 9) early October (red A) of last year, we turned bullish toward the biotech sector. As you can see from the above chart, the RS turned into a column of X at 45 in early October (red A) and hinted that the Biotech's may be getting reading to lead a recover. The Biotech Index (BTK.X) did lead and outperformed the S&P 500 until November (red B). Now we see a recent reversal back into a column of X once again, so our thinking is now like that of last October.
The reason I'm using the BTK.X instead of the Biotech HOLDRS (BBH) to measure relative strength is that it gives us a broader range to measure against. The equation for deriving relative strength is very simple. Take the close of the BTK.X and divide by the SPX. Since today's close for the BTK.X was 496.96 and the close for the SPX was 1,097.98, we're able to derive a value of .4526. Multiply that .4526 by a factor of 100 and you get 45.26 which is a chartable value.
To remove "noise" we chart RS just as we would a stock, using the 3-box reversal technique. To get the above chart into a column of O (weakness), we would need a calculation of 44.
Now, lets look at a bar chart of the Biotech HOLDRS (AMEX:BBH) and see what may be taking place there. We're going to use regression channels and retracement to identify levels and set some near-term goals. In an early part of a potential rebound, you're going to have some hurdles to clear. These hurdles become tests.
Biotech HOLDRS Chart - Yesterday's Daily Interval
The Biotech HOLDRS (BBH) closed right at their session high of $120.00 today and right on the downward regression channel. The current technical are very similar to that found in early October where relative strength of the biotechs grew stronger. If the BBH can close above the $122 level and make a move to $124, I think a longer-term bullish move could present itself. Since bulls in the sector would be very early in a new bullish move, I'd start with a stop just Tuesday's low and our 50% retracement level of $115.69, with at stop at $114.
For a trading strategy of a less aggressive bull, think about establishing just 1/2 position. Then if some "market event" has selling in the group, a lesser amount of capital has been exposed. The first hurdle most likely comes at the $121 level. I will also note the 200-day moving average at $124.97. Now comes the potential icing on the cake for our bullish trading scenario. The potential triple-top at $124.
Biotech HOLDRS Chart - $2 box
Some of the things we see in the bar chart also show up in the point and figure chart. The first thing that catches the eye is the current downward channel. For bullishness to take place in this supply/demand chart, we would need to see a trade at the $124 level. In essence, a bullish trade right now is a little early, but I'm going to defer to the relative strength chart of the biotechs vs. the S&P 500 to be looking long. Subscribers have asked me before if I try to "pretend" how a trade would unfold and look down the road. The answer has been yes. What that does for me is then gives me a scenario to test against and help manage the trade going forward.
If we were to get a trade at the $124 level, that would turn the now current bearish vertical count of $110 (the BBH traded a recent low of $111.68) bullish and have us looking at a longer- term initial bullish count of $142.
As mentioned earlier, there are some things that need to take place going forward for this trade to unfold in our favor. Given the prospects of a longer-term bullish target of $142 ($22 upside from today's close of $120) and downside risk to a stop at $114 ($6 downside) I like the risk/reward $6/$22.
How's the "big daddy" in the group doing?
"The Big Daddy" for the biotechs is Amgen (NASDAQ:AMGN) and while she has bent lower from the $67 level when rumors first circulated that AMGN might be buying fellow biotech Immunex (NASDAQ:IMNX) and were finally announced on December 17th, the stock had already fallen to the $56 level. Since that time, the stock has been in a base-building phase, but starting to make some strides to the upside.
Amgen Chart - Yesterday's Daily Interval
Despite the market turmoil since the beginning of the year, the sharp decline prior to and immediately after Amgen (AMGN) announced it would buy Immunex (IMNX) looks to have removed some risk in the stock. While some market concerns over accounting issues had added to market uncertainty, the ability of AMGN to hold the $54 level on a closing basis is impressive.
For those looking to play the Biotech HOLDRS (BBH) bullish or any biotech stock for that matter, then shares of Amgen (AMGN) should be monitored. The first hurdle here would be a break above the 200-day moving average at $60.64. Should that take place with the triple-top at $124 in the biotech HOLDRS, then we're going to be getting some further signals that the biotech's may indeed be ready for a new leg higher.
For those that don't know, the Biotech HOLDRS (BBH) are similar to a mutual fund. It is a "basket" of biotech stocks. The bulk of the BBH is concentrated in AMGN, IMNX and DNA. Other components include BGEN, ABI, MEDI, CHIR, GENZ, GILD, SEPR, IDPH, QLTI, MLNM, SHPGY, AFFX, HGSI, ICOS, ENZN, CRA and ALKS. Since AMGN has disclosed it will be buying IMNX, these two stocks are trading in unison. However, that will have AMGN making a much larger impact on how the BBH shares trade going forward.
You can get more information on the Biotech HOLDRS by visiting this link at the American Stock Exchange http://www.amex.com/structuredeq/holdrs_bbh.stm