Friday, October 4, 2013

IBB Biotech ETF Weekly and Daily Charts Rising Wedges Overbot Negative Divergence Biotech Bubble Ready to Pop

The main reason that the small cap RUT has jumped higher this year outperforming the market is due to the strength in the speculative biotech stocks. They are the fave sector this year and as seen on the weekly IBB chart, price moves from 85 to 210 in 26 months, a couple years, +150%!!  Note how the brown channel takes over this year sending price on a steeper up slope and then the recent action that is parabolic over the last few weeks. These moves always end in tears. The red rising wedges are ominous since the correction from this pattern can be quite dramatic to the downside. The wedge has space available to 220. Keystone's 80/20 rule says the 180 should lead to 220; it is nearly close enough for government work. To play it safe, a potential short trade can be entered at 220+, but this would risk missing the ride lower. A scale-in approach on the short side is likely more prudent with shorting some IBB now, and then at say 10 increments higher.

All the indicators across both charts are negatively diverged except for the MACD line on the weekly. This  hints that price will want to print in the apex of the rising wedge. At that point, the MACD line should negatively diverge to lock in the downside ahead. So price may need a week or two to continue to top out. The Biotech Bubble grows and it is plump and juicy. Be careful with sharp objects since it is about to pop and the aftermath will not be pretty. If the politicians create a happy rally, this may be the push for IBB into the 220's that appears a great place to short from at this juncture. Price is extended above the MA's and needs a mean reversion just like the prior times, only this time negative divergence is in place which will likely create a greater down move. Since biotech carried the RUT higher, when the biotech bubble pops it should cause small caps to then outperform on the downside. Projection is sideways to sideways lower for IBB for the weeks and months ahead. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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