In early February, I pointed out a short-term bottom in the Biotechnology Index ($BTK.X) at 450. That level is coming back into play. Amazingly, we've had two more observations at the 450 level since early February. I'm convinced that institutional traders are using that level to defend biotech shares.
The 450 level first came from an observation I made on a longer term Point and Figure chart. I used a 25 point box to get a bigger view, and ran across a peculiar pattern. What I found was that the BTK was four columns deep into a lengthy consolidation. The 450 level marked the bullish support line of that consolidation.
BTK.X - 25 Point Box
The 450 level was reinforced by a long-term retracement bracket, going back to late 1999 to find the lower anchor point. As the chart depicts below, the 61.8 percent retracement level sits at the 450 level. (The trend lines reinforce the narrowing range on the PnF chart.)
BTK.X - Weekly
The way that the institutions are defending the 450 level is amazing. The precision of buying that has taken place at that level on three separate occasions is truly impressive. Three times, the BTK.X has come within a fraction of printing 450.00, which would break the bullish support line on the PnF chart.
BTK.X - 450 Defense
Three times, the smartest trade in the BTK.X has been to buy the index (or its strong components) as it approaches the 450 level. I'll continue to condone that approach until the 450 level is broken. But if that break comes, I think there's a good trade lower in the group, more than 25 points worth in the BTK.X. The index itself is acting differently than how it traded in early February, when it rocketed off of the 450 level. I don't know if this difference portends a breakdown, or if it's merely a shakeout. In either case, I think the importance of the 450 level makes for an easy approach to the BTK.X. Risk management is so easy on bullish plays near 450: simply buy the BTK.X (or its strongest components) as close as you can to the level. From there, use a mental stop at 450.00. On a print at 450.00, look to get short the BTK.X (or its weakest components) for a quick trade lower.