PUTTING THE BIOTECH DECLINE INTO PERSPECTIVE, GILEAD SURGES ON BIG VOLUME, MANAGING THE UPSWINGS IN OIL AND ENERGY, SEASONAL TENDENCIES FOR OIL, DOLLAR HITS SUPPORT ZONE
PUTTING THE BIOTECH DECLINE INTO PERSPECTIVE... Link for today's video. It has been a rough ride for biotechs since mid March, but I am not ready to throw in the towel on the long-term uptrend. Chart 1 shows the Biotech iShares (IBB) with two sharp declines over the last two months. These are indeed big declines, but IBB is a volatile ETF and I think we need to put price action into context. The ETF was up over 40% from mid October to mid March. Some sort of corrective period after such an advance is perfectly normal. The million Dollar question is: At what point does a correction turn into a trend reversal?
It is important to account for volatility to allow for reasonable pullbacks. As such, I am using a Raff Regression Channel to define this uptrend. The middle line is a linear regression. The outer lines are equidistant from the furthest high or low, which is the mid October low. I am really only interested in the lower line because it reflects the furthest distance from the linear regression during this uptrend. A move below this lower line would show an "outsized" decline that would be worthy of a trend reversal. Taking into account the March-April lows, I am marking support in the 320-330 area.
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Chart 1
The indicator window shows 14-day RSI oscillating between 30 and 80 the last eight months. Note that 14-day RSI has not been below 30 since March 2014. I normally use 40-80 as my bullish range for RSI, but IBB has above average volatility and I am willing to extend the range. Why turn bearish on a move below 30 (oversold) you ask? Because it takes strong selling pressure to produce an oversold reading in RSI. Conversely, it takes strong buying pressure to produce an overbought reading. Note that RSI exceeded 70 four times in the past year and these overbought readings occurred in an uptrend. Chart 2 shows the Biotech SPDR (XBI) for reference.
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Chart 2
GILEAD SURGES ON BIG VOLUME... Gilead (GILD), a big biotech stock, did not partake in the big biotech advance from mid October to mid March. This period of relative weakness may be about to change as the stock bounces off the rising 200-day moving average. Chart 3 shows the 50-day SMA flattening out over the last few months and converging on the rising 200-day moving average in April. There appears to be support near this rising 200-day because the stock does not stay below this level very long. Most recently, GILD was below the 200-day on Thursday and surged above on Friday with a big advance.
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Chart 3
The indicator windows shows GILD relative to the Biotech iShares. It is clear that GILD marched to the beat of a different drummer from October to March as the price relative fell (relative weakness). This period of relative weakness may be coming to an end because the price relative (GILD:IBB ratio) formed a higher low in April and broke above its late March high last week.
Chart 4 shows GILD with a big advance and then a long correction. Notice that I used the term "correction". Even though prices have been sideways to lower for most of the last six months, the majority of this price action occurred in the top half of the chart range because the October dip below the 50% retracement was very brief. In fact, most of the price action since November has been above the 38% line. I am also seeing evidence that this correction is ending because the stock broke the blue trend line, held above the early April low last week and surged on the biggest volume since early February. A close below 99 would call for a reassessment.
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Chart 4
MANAGING THE UPSWINGS IN OIL AND ENERGY... The Equal-weight Energy ETF (RYE) and Spot Crude ($WTIC) remain in upswings and recent breakouts are holding. Even though both remain below their falling 200-day moving averages, I am bullish for energy and oil right now. Let's check the charts to see what could prove this bullish stance otherwise. First, note that I am using the Equal-weight Energy ETF instead of the Energy SPDR, which is weighted by market cap and dominated by two stocks (CVX and XOM). The Equal-weight Energy ETF is a better representative of the sector as a whole because all stocks are treated equal.
Chart 5 shows RYE within a clear upswing and with a breakout. The green lines mark a large inverse head-and-shoulders pattern, which is a bullish reversal pattern. RYE broke above neckline resistance and this breakout is holding so far. Despite this breakout, the ETF is nearing the falling 200-day moving average. One could argue that the long-term trend is down because the ETF is below this moving average and this moving average is falling. Nevertheless, the current swing is up and support in the 70-71 area holds the key. Broken resistance, the late April low and the Raff Regression Channel mark support in this area. A break below this level would reverse the upswing and negate the neckline breakout. Until such a break, the path of least resistance remains up.
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Chart 5
Chart 6 shows Spot Crude ($WTIC) with a breakout in mid April, a pennant in late April and a pennant break last week. Even though oil is up some 40% from its mid March low, it is still well below the falling 200-day moving average. Nevertheless, the immediate trend is up and the provisional target is the 200-day moving average as long as this trend holds. While a move below 57.5 would negate the pennant breakout, I am going to use the pennant lows and a buffer to mark upswing support at 55. A break here would clearly reverse the seven week uptrend.
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Chart 6
SEASONAL TENDENCIES FOR OIL... Seasonally, May has been one of the weakest months for oil over the last twenty years. Before looking at some of these numbers, note that I do not use seasonal patterns for timing purposes. The seasonality tool is just one indicator and the price chart is still the main driver. Furthermore, there are usually only a few months that stand out on a seasonality chart. Months that closed higher more than 60% of the time and months than closed higher less than 40% of the time. Readings between 40% and 60%, which make up the majority, do not offer much edge.
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Chart 7
Chart 7 shows the seasonal tendencies since 1996. October is the weakest month because oil has been up only 32% of the time and the average gain is a loss (-3.5%). Oil has moved higher just 40% of the time in May, but the average gain is still .7%. This suggests the gains in May, while fewer, tend to be bigger than the losses. This is not a great statistical edge, but it does suggest that oil could be in for a rough ride in May and I will be watching the upswings shown on the charts above.
DOLLAR HITS SUPPORT ZONE... The Dollar was smacked hard over the last two months, but I still view this as a correction within a bigger uptrend. Chart 8 shows the US Dollar ETF (UUP) basing in 2014 and breaking three resistance levels with a massive advance. My assumption here is that this is an impulse move and the decline from 26.5 to 25 is a corrective move. I am assuming that the big advance is impulsive because of its size and the breakouts. An impulse move is a move that is part of the bigger trend and in the direction of the bigger trend. A corrective move is a smaller move against the bigger trend. Working under this impulse-correction assumption, I am looking for potential support levels that may foreshadow an end to the correction, and we are at one now. The Raff Regression Channel and the February consolidation mark such a support zone in the 24.5-25 area.
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Chart 8
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Chart 9
Chart 9 shows daily bars for more detail on the correction. UUP is firming in the support zone, but we have yet to see an upside catalyst that would suggest the correction has ended. The indicator window shows the Aroon Oscillators with a bearish signal in early April. This occurred when Aroon Down moved above Aroon Up and hit 100. This signal would be reversed if Aroon Up surges above Aroon Down and hits 100. Note that the Aroon Oscillators on the weekly timeframe are in bull mode. Chart 10 shows the Euro ETF (FXE) in a long-term downtrend and chart 11 shows the Yen ETF (FXY) with a bearish descending triangle taking shape.
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Chart 10
