Monday, May 11, 2015

IBB Biotech Weekly Chart

Fed Chair Yellen warned about stretched valuations in biotech and social media stocks in early July 2014 (purple circle). A brief pull back occurred but the chart clearly shows the huge gains that followed with the IBB running from 260 to 380. In its 102-year history, the Federal Reserve has never been able to identify a bubble ahead of time. Perhaps the Fed is trying to shake its century-old losing streak with Yellen once again stepping out on a limb on 4/29/15 proclaiming high valuations in some stocks such as the biotech sector.

The IBB was already coming off the top due to the negative divergence (red lines). Price is extended above the moving averages requiring a mean reversion but the sector remains hot. Treat the 20-week MA at 336 and rising with respect since price uses it as support. Trouble is ahead if it fails. Note the huge selling volumes on the down weeks over the last couple of months. The media is hyping the biotech stocks day after day due to the merger activity and the retail investor is getting caught up in the party. The volume candlesticks show the institutions, that have made a bundle over the last couple years in IBB, distributing their shares to Joe Retail, the bagholder.

The IBB monthly chart is negatively diverged across all indicators except for the MACD line. This is similar to the Nasdaq indexes, that would be expected since biotech and tech control these indexes, where one more matching high is expected before a multi-year top is printed at anytime moving forward. The biotech, tech, IBB and Nasdaq stocks and indexes will likely top out during May-July for a multi-year top. Therefore, sideways action would be expected in IBB going forward with some further buoyancy higher but there is no interest in playing the long side. In June, IBB may be set up for a short play. Yellen is likely correct on her high valuation call but it may take a couple more months to roll IBB over to the downside for a multi-week and month selloff. 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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