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If the Biotech Generals Turn Tail, Expect The Troops to Follow

Mar 07, 2014 9:05 am Print Print

More than anything, what defines market tops is sentiment. Valuations get stretched and always go to extremes at highs and lows. But it is the ether of sentiment that pervades the party when valuations matter.
Sentiment does not help with timing, but when players are living in the now and caught up in the action -- driven by excitement and greed -- that is the environment that pervades market tops.
In late March, 2000, I wrote a piece on the market called "Pop." The biotech bubble looked like it was going to pop and take the rest of the market with it. When the generals do an abrupt about-face, the troops usually aren't far behind.
A classic example of sentiment can be seen during the wild bull market in 1999, leading to the March 2000 top. Market sentiment was flirting with all-time highs, and market valuation was at historic highs. What that means is the market was extremely overvalued by any historic comparison.

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However, good common sense shrugged off P/E ratios, book value, and dividend yield. The vast majority of investors were caught up in the moment and overcome by excitement and greed. They manufacture reasons and answers and narratives to underpin their bullishness.
In the late 1920s, people said it was a New Age, the Industrial Age and that the OLD rules don't apply. It's a NEW era.
In 2000, it was the Information Age, another NEW ERA. The old rules don't apply.
At tops, sentiment trumps common sense.
Why didn't everyone get it? Because common sense was at low tide and market sentiment, which had been rising, was peaking. Most market participants are living in the now and caught up in the action and driven by the excitement -- and the greed.
When sentiment corresponds to technicals, it pays to be attentive.
Anytime you can draw a trendline that connects three historic points and dates, you have a meaningful trendline.
On a monthly SPX (not shown), a trendline can be drawn that connects the historic 1982 low with the 1987 low and the 2009 low. For good measure, this trendline happens to capture the 1984 low and the 1990 low. Happenstance?
So, it would seem useful to create a price channel using this amazing trendline. The most significant point between the above dates by far was the 2000 market top.
Paralleling the trendline that connects those bottoms with the 2000 tops ties to current levels on the S&P 500.
When you drill down to the dailies, the relationship is clear.
The original trendline acted as support in 1987, 1990, and 2009. Now, we are seeing the FIRST test of the upper rail of the channel.
Long-term Chart:

Click to enlarge
The first time up to this channel line should act as serious resistance. Just how serious, only time will tell.
However, if history is any guide, and it is, the periodicities between the intervening highs and lows suggest something major.
To wit, from the late 1994 low to the March 2000 top was 63 months. From the 2000 low to the 2007 top was 60 months. We are exactly 60 months from the 2009 low.
Have you noticed that on the above chart, yesterday's price action reached the upper rail of the channel for the first time since 2000. And remarkably, this occurred on the anniversary of the 2009 low. Happenstance?
Are low-priced speculative stocks exploding like cheap fire crackers and high flying glamours soaring like they did in the first quarter of 2000?
Is the market imbued with a sense of gambling and unreality similar to 2000? Does it feel too easy?
Fortunes were made into the 2000 top, but fortunes were lost afterwards. It's not how much money you make in the market that's important but how much money you keep.
Would it shock you to learn that the current bull run has rallied further than the advance into 2000! The current bull market has advanced 1215 points from low while the move into 2000 was "only" 1110 points.
That said the advance into 2000 was greater percentage wise, 250% versus 182% for the current adcance.
It may shock you to learn that 1110 is straight across and opposite March -- March 6 to be precise -- and that 1215 is roughly 90 degrees square March 6.
What we can determine from the above is that the market should be at a major turning point. But, we need the price action to confirm. Price is the final arbiter.
But it would not be surprising to see a reaction come swiftly and out of the blue, such as the action in the biotechs yesterday.
Many biotech and pharmaceutical glamours got hit yesterday.
Moreover, yesterday was not the first big hit. It was the second substantial distribution day in a week.
Names include Celgene (CELG), Gilead Sciences (GILD), Isis Pharmaceuticals (ISIS), and Jazz Pharmaceuticals (JAZZ) to mention a few.
I looked at JAZZ on Wednesday night to use as a possible Hook, Line & Sinker sell setup but passed because the trend is so strong and the stock is very high-priced. Wednesday's N/R 7 Day got my attention, but it could have gone either way, especially given Monday's large Bottoming Tail. That said, JAZZ showed several serious distribution days. It would have been a good Either Or Setup -- bracketing the opening range and going with whatever way an ORB went.
The biotechs are generally the most speculative area in a market that has been highly speculative. A monthly chart of the IBB shows the biotechs have gone parabolic.
Monthly IBB Chart from 2011:

Drilling down to the dailies shows that this leading index did not set new highs in concert with the SPX and left a second large distribution day on Thursday, following up on the large distribution day on February 28.
Daily IBB Chart:

IBB looks poised to test its 50 DMA at around 243. The 50 is coincidening with a trendline connecting lows since last November.
If Monday's Bottoming Tail on both JAZZ and IBB are snapped with authority, they should accelerate to the downside.
Broken patterns, in this case broken bull tails, often times lead to fast moves in the opposite direction.
As offered above, if the generals turn tail, the troops will probably not be far behind.
This morning NewLink Genetics (NLNK), a genetics company, is another name getting taken to the woodshed.
Daily NLNK Chart for 2014:

10-min NLNK Chart for Pre-market:

Conclusion: Following Tuesday's surge in stocks, the RUT left an N/R 7 Day (the narrowest range in 7 days) on Wednesday. Becase Wednesday was such a narrow range, Thursday's outside down session is not necessarily indicative of a reversal. However, the count is a potentially bearish Crouching Tiger (a proprietary pattern), which would be confirmed by downside follow-through of consequence.
RUT Daily Chart:

Below point A violates a mid-channel line and implies a test of the lower rail of around 1180.
A break of the lower rail and 1180 implies a test of Monday's Bottoming Tail. If Monday's tail is snapped, the implication is the best gainer of the year on Tuesday was a Buying Climax.
Importantly, the 1213 RUT high is 90 degrees square this week. This 90-degree relationship between price and time often defines major highs and lows. It was the same relationship that played out on the SPX at the October 2007 top and the SPX March 2009 low. The important thing to remember is that while all major highs and lows are square-outs of time and price, not all square-outs are major highs or lows. It is the behavior from here that will tell the tale.

Click to enlarge
Form Reading Section:

ISIS Chart:

CSIQ Chart:

No positions in stocks mentioned.



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