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Biotech: The Superman of Markets Just Found Its Kryptonite

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This March could be pivotal for stocks.

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This article originally appeared on Jeff Cooper's Daily Market Report. To get Jeff's commentary plus day and swing trading ideas each day, take a FREE 14-day trial to Jeff Cooper's Daily Market Report.

Following Friday's reversal, the market did the obvious on Monday: It followed through to the downside from an up opening.

On Friday, March 7, I wrote a piece entitled If the Biotech Generals Turn Tail, the Troops Will Follow (subscription required).

Biotechs got hammered on Friday:



The broader markets buckled with the biotechs, but what was not obvious was that the S&P 500 (INDEXSP:.INX) rallied back to hold above the important cycle lows from the first week of March.

On the heels of a decline to its 50 dma on March 14, the Friday-to-Monday waterfall decline in the iShares Nasdaq Biotechnology Index ETF (NASDAQ:IBB) followed a 1 2 3 Snapback to the overhead 20-day moving average on March 18.

So while Gilead (NASDAQ:GILD) was presumably the culprit on Friday, the entire sector (represented by IBB) had turned its three-day chart up at the 20 dma for a Holy Grail sell signal, which follows three large distribution days right off a high.



Monday was day two of a possible three-day surge, so despite the fact that the monthlies have now turned down indicating a possible reflex bounce, further weakness may play out today as waterfall moves often trace out a three-day climactic pattern.

It's worth taking another look at this IBB chart from yesterday's report (subscription required):



And checking a monthly IBB chart from 2011 to present shows that February was the largest range month since the ramp began. So the signs of distribution in early March warranted extreme caution.



Now, the monthly IBB chart has left big-picture bearish Train Tracks, unless a miracle plays out before the end of March.

Biotech has been the Superman of the market, and March looks like kryptonite.

This could be a raid by a big fund on its competition, with IBB finding support near the 214 square-out level and its 200 dma. However, it sure feels like the pattern from 2000 when the Dow Jones Industrial Average (INDEXDJX:.DJI) topped in January and the Nasdaq 100 (INDEXNASDAQ:NDX) and S&P 500 made highs two to three months later amid a frenzy of IPOs.

Longtime readers will remember that sometimes we see quarter-end window undressing, rather than the usual window dressing. In other words, sometimes a big fund or funds will drive up a group of stocks well ahead of quarter end, forcing the competition to chase for performance. Then this big fund will hit the bids on a position a week or so ahead of quarter end, causing the competition's performance to suffer.

Remember, in the money management game, it's not just about how well you do, but how well you do relative to peers. This ploy may be playing out. It's an example of how markets have their own innate dynamics, which often have little to do with fundamentals.

If the negative action continues past quarter end, we're probably dealing with a different kettle of fish -- perhaps a kettle of salmon for the bear.

Typically we examine the S&P 500 and Russell 2000 (INDEXRUSSELL:RUT) when trying to identify time/price cycles with the Square of 9 chart.

Let's take a look at the NDX to see if early March may have been a significant square-out. According to W.D. Gann, all major highs and lows are time and price square-outs and harmonically related. Rounding the March 6 NDX high of 3738 to 374 shows that 374 is 180 degrees opposite March 6.


Click to enlarge

I don't think it's happenstance that the SPX, RUT, and NDX all had square-outs around the 60-month anniversary of the 2009 low.



The NDX snapped the important March lows on Monday and bounced back to its 50 dma.

The break looks like it's confirmed a 5-Point Megaphone Top.

Additionally, the NDX broke well-tested support (the mid-channel line) throughout November/December and looks like it carved out a rebound to set new highs in March, though it became exhausted and failed to tag the upper rail. In doing so, it carved out a rollover top.

The lower rail of the NDX channel looms large. The normal expectation would be for a bounce from a test of the lower channel rail carving out a three-point trend line, possibly a back test of the 50 dma into quarter end or early April. From that point, if further selling pressure shows up, April could be ugly. We'll walk through the big-picture cycles that hit in April in tomorrow's morning report.

Conclusion: The market usually, but not always, gives warnings. The biotechs have been waving a red flag since the first week of March.

And, as stated above, there were square-outs on the S&P 500, Russell 2000, and Nasdaq 100 in the first week of March, which ties to 60 months off the 2009 low, the 2002-2007 bull market, the 1995 to 2000 advance, and the 1982-1987 run. Crashes followed each of those 60-month run-ups.

I don't know if a crash is going to play out, but as offered in this space, we've been working off the premise that the market has followed an analogue (subscription required) to the five-year advance off the 1932 low. That rally ended in March 1937.

Strategy

In a market that's seduced by momentum and induced by easy money, technicals dominate. I suspect that if the major indices test their February lows and turn up, the calls of a double bottom having formed will be loud, as will the hope that the momentum will renew in hot stocks.

This is how many dramatic declines set up, with the narrative of a perceived double bottom followed by a failed snapback attempt that leads to a break of the double bottom.

What looks like a change in character is also playing out with the Four Horsemen -- Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG), Tesla (NASDAQ:TSLA), and Amazon.com (NASDAQ:AMZN) -- catching the flu yesterday.

Here are charts of Netflix and Google that illustrate the action:





Form Reading Section



To get Jeff's commentary plus day and swing trading ideas each day, take a FREE 14-day trial to Jeff Cooper's Daily Market Report.

Twitter: @JeffCooperLive
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No positions in stocks mentioned.

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