IBB, Anatomy of a 'sell' signal 03/01/2014

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The Nasdaq Biotechnology Index             consists of 122 stocks and out of those 122 only 6 closed green on Friday, 02/28/2014. 9 of those 122 stocks are also in the $NDX/QQQ where they collectively make up 12% of that index, slightly more than AAPL             .

From the beginning of 2013 until the most recent closing high, IBB             has run up 100% and has been an important factor in the $COMPQ and $NDX rallies. Weakness in this sector is certain to impact $COMPQ and $NDX by, at minimum, stalling the rallies in these two indexes or perhaps pressuring these two indexes lower.

IBB             has become extended above it's near term MA's and as you can see on the chart, when it pulls back, it likes to visit the area around the 50MA. Because the .764 Fib retrace is also right where the 50MA is, then this seems like a logical target area. A failure to hold at the 50MA would probably mean a test of the last swing low at 233. However, in the last year, IBB             hasn't revisited a swing low support area so, unless something has changed, it isn't likely to revisit or take out the most recent swing low

There were all kinds of warnings on the chart before the most recent drop, the most important, IMHO, being the RSI negative divergence.

For all I know, IBB             may reverse on Monday but if it doesn't then watch for the RSI to drop to 50 as that is where it has turned recently. If the RSI doesn't stop there, then watch for a drop to 30 as an oversold signal. At the same time, watch the CCI for a drop below -100 and then a reversal and rise back above -100 as that is generally a good signal that the decline is either over or soon will be.

The point of this exercise is that the $SOX index, with several shared components in the $COMPQ & $NDX, has been flat for the last 7 sessions, and now you have IBB             exhibiting weakness. The $COMPQ & $NDX under performed the other major indexes this past week and they have been the drivers behind this rally since day one but they're not going to be able to maintain these important leadership roles if sub-sectors begin to flounder.

Added Sunday, 03/02/2014: I just read that 7 of the top 10 stocks in the Russel 2000, $RUT/IWM are biotech stocks.

Just wanted to point out that from mid-January through the first week of February, IBB formed a classic bull flag pattern, and then broke out of that. If you look back at a chart of IBB, you will see that IBB has formed many other such formations before breaking out and moving higher. The current situation is now looking like another bull flag formation with several days to go and the 50MA still looks like a good target. But it will be important to see what happens when or if this area is reached as IBB may have a bit more downside to go before it bottoms.

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