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Markets and sectors that have large painful corrections usually bottom in three tranches. The first tranche of stocks to bottom in a sector or market experiencing a bottoming process are the high-quality names that are no longer perceived to be overvalued, followed by the medium-quality names and, finally, the less-than-quality names. It's a process that takes awhile to fully play out -- but my daily and weekly work is showing me that the process began in the high-quality biotechs over the last two days and that there's a good chance we may have finally found a tradable low in biotech land (but, as I mentioned above, not necessarily in all biotech).
How long can a tradable bounce last? That depends on the magnitude and duration of the rally attempt.
As it relates to the iShares Nasdaq Biotechnology Index ETF
(NASDAQ:IBB), it needs to contend with the 222-224 area, after which I'm looking for a move to 233-235 and then will reassess. While it wouldn't surprise me to see an eventual IBB retest -- at or near its recent lows (it's actually quite healthy to have that happen) -- I don't see that retest as a high probability within the next few days. That being said, support comes into play at 213 and the obvious 208 level. As always, proper risk management is key!
The markets are a leaky place. And while we might never know exactly what caused the equity market (and virtually every high-beta sector and stock) to either V bottom or take off yesterday at 1:00 p.m. EDT, I suspect it had a lot to do with a combination of an intraday triple bottom at S&P 500
(INDEXSP:.INX) 1815-1816 (occurring over the last three days) and the completion of a very large and aggressive basket-selling algo that a few privileged people knew was going to finish at 1 p.m.
Sometimes you're the bug and sometimes you're the windshield. We'll see how this plays out!
(The "cloudy" stocks are a different story and those are best viewed on a case-by-case basis these days.)
No positions in stocks mentioned.
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