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Biotech HOLDRS trade quadruple-top

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A couple of weeks ago we profiled a bullish trade in the Biotech HOLDRS (AMEX:BBH) $124.31 +3.4% as a place for "technology bulls" to be looking. It's taken awhile, but today's trade at $124 does have the BBH giving a quadruple-top buy signal and breaking a longer-term downward trend.

Subscribers to premierinvestor.net that did establish 1/4 or 1/2 bullish position can average up at current levels as the vertical count has now turned bullish to $142.

Biotech HOLDRS Chart - $2 box

In Friday's wrap on premierinvestor.net we felt the Biotech HOLDRS (BBH) might be ready for a move higher, but we needed some leadership from some stocks in the group. We looked at some charts and pointed out that shares of IDEC Pharmaceuticals (NASDAQ:IDPH) $68.80 +4.67, might be a stock for bulls to trade long at the "head of the snake" in the Biotech HOLDRS (BBH) at the $66 level.

IDEC Pharmaceuticals Chart - $1 box

We've talked before about identifying a stock or two in a sector that looks to be at the head of the snake. Since the BBH may be a bit pricey for an investor/trader to buy a round lot of 100 shares, then it made some sense for a bull in the group to perhaps have identified a bullish trade in a stock that is a component of the BBH to look for a trigger point for bullish entry. Shares of IDPH gave the buy signal at $66 that bulls were looking for and continues to trade strong. According to Professor Davis' study, the spread triple-top buy signal is profitable for the bullish trader 85.7% of the time, for an average gain of 22.9% in 7.7 months. Given that statistic, bulls may be targeting the $81.11 level (22.9% gain from $66). That would have the stock exceeding the bullish vertical count of $76. Nonetheless, a couple of technical indicators hinting at higher price for IDPH.

For an options trader in the BBH, this too may be an important observation. It takes stocks moving higher to get an index to move higher. We like to monitor both ends of the snake to get a feel for how the snake is moving.

In Friday's wrap, we did the exact same thing with the Biotech HOLDRS that we've shown with our Dow Industrials "hypothetical" portfolio by taking some imaginary money and placing it in each of the components stocks. We created the "benchmark" as of the February 20th close. The BBH is a weighted index. Here's how that portfolio would look if you had bought each stock in the index on the February 20th close and weighted the number of shares in your portfolio based on the BBH weighting of shares.

BBH "hypothetical" portfolio - sorted by cost basis of 2/20/02

What this type of monitoring allows the trader to do is perhaps better understand what's moving, what's strong and what's weak. As an individual stock trader, I like to try and focus on the more heavily weighted stocks or those that may actually be near the front of an institutional trader's radar screen. Last Friday, IDEC Pharma (IDPH) passed some of the tests we through at it from the point/figure charts as it relates to a bullish vertical count and some relative strength qualities a bull should be looking for.

Jeff Bailey
Senior Market Technician
Option Investor

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