Sunday, November 24, 2013

IBB Biotech Weekly Chart Overbot Rising Wedge Negative Divergence Price Extended Biotech Bubble Ready to Pop

Future Fed Chair Yellen looks under the table for bubbles. Nope, none there. She turns the couch cushions, nope, no bubbles there either. The outperforming sectors this year are biotech, healthcare, consumer discretionary, and to a lesser extent but also strong, industrials and financials; IBB, XLV, XLY, XLI and XLF, respectively. Bubbles are different things to different folks. Don Ho, the legendary singer and schmoozer, preferred Tiny Bubbles, perhaps that is what is floating 'in the Fed's QE wine'. 'It makes traders happy, it makes them feel fine'. Biotech is a big bubble. Keystone uses chart patterns and technical analysis to identify the bubbles. A move from under 60 to over 220, in 4-1/2 years, +270%, a 4-bagger, moving upwards about 60% per year ever since QE1 started in March 2009.

The negative divergence on the chart is wicked as price moves parabolic. Biotech has momo, but just as the 'dogs of the Dow' theory typically works (where the underperforming Dow stocks outperform the following year), the converse works as well where the outperforming sectors this year may lead to underperformance in 2014. Everybody and his bro is in biotech, even the mailman and the gardener. If lucky enough to ride the biotech sector over the last 4 years, take the money and run without looking back. The 4 horseman of the biotech run, GILD, CELG, REGN and BIIB, may turn out to be the 4 horseman of the apocalypse. These type of monikers are reminiscent of the dot-com bubble in late 1999 early 2000 with the 4 horseman of tech back then; CSCO, DELL, INTC and MSFT (also Sun, ORCL and EMC).

It is always difficult to short momo stocks but there is no compelling reason to own biotech moving forward. The overbot conditions, rising wedge, negative divergence and price extension above the moving averages all say down moving forward. Early 2014 will determine if biotech can muster some sideways action at the elevated levels or if the parabolic snap-back to the downside is more serious sending price to 100-150. If long, walk, or run, to the exits. Speculative traders can entertain starting short positions in IBB, CELG, GILD, REGN and BIIB. If Yellen does not see any bubbles in the market as she states, she must expect IBB to be 300 as she dons the celebratory 2014 rose-colored eyeglasses at the Fed's New Year's Eve party. 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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