Biotech in Trouble?

I was bullish on biotech this summer as you know if you were reading back then. I set an alert on XBI's green trendline with the name "Biotech in Trouble?" It triggered near the close today. It's weakness strikes me as bearish and a follow-through on weakness would be bearish in general since this is one of the better performing rally sectors. Conversely, IBB the large-cap biotech still has an inverse H&S pattern going. Since XBI is more volatile nd smaller market cap, I view it as signaling market weakness. I also included large cap pahrma (IHE), small cap (XPH). medical devices (IHI), providers (IHF)

and the overall healthcare sector (XLV).

Biotech Remains Relatively Strong

If you're long only, wait for buying on the dip.

If this is a big bear market, it could play out something like this:

Biotech Symmetry

Biotech is still going strong with the symmetry.

Rally Done? Biotech Candle

IBB doesn't have as nice a (potential) reversal candle, but it is failing at the 2015 high...

The ratio chart of biotech to Nasdaq, and energy, both point to potential outperformance. For this reason, I'm not targeting biotech ETFs for shorting. At this moment, I also have no bitoech stocks on my radar. That said, I used this to time the rally and a reversal would support thinking the market rally in ending.

Update: Candle has improved into the afternoon, but still signaling a peaking rally.

Biotech vs Energy

My first pick for the rally was biotech and I said short energy was the trade of the second half.

June 17: If You Gotta Buy, Buy Biotech. IBB up 17% since then, XBI closer to 28 percent.

I mentioned short energy as the second big trade setup of 2022 back in late May. It then moved into full bloom in June.

Remembering this pair, I thought to look at biotech versus energy. The verdict: even more confident in the deflation, short energy call. Biotech beat energy in 2008 too, and there's now an inverse H&S on the ratio chart.

If you think you can't chart ratios, here's XLE and SPY.

This ratio points to around $40 for XLE with the price ratio falling back towards 0.10 versus SPY. If support holds it might stop at 0.15 which would be bullish. If SPY is down around $300, that tranlates into $30 to $45 for XLE.

Biotech Rolling Over or Coiling?

Biotech led the rally, now it could be leading the reversal. A final pop could also be coming if the market does another squeeze, but right here I'm thinking it could be topping out.

The Tech-Oil/Bond Seesaw

Although tech is rising, bonds are rising and oil is falling, I noticed that most days I'm either losing money on the tech positions while gaining on oil and bonds, or vice versa. This morning is one of those days, with bonds up and oil down, and maybe an unsurprising pullback in stocks, or not. Maybe today will break the pattern. NQ is down 0.09 percent as I'm typing.

The charts aren't terribly interesting at this point. The bases are complete. The two most important breaks for a stock market rally will be ZB completing the inverse H&S and CL descending into the $80s. The only thing I'm inclined to do here is manage my USO put position. I actively trade crude because it is volatile, and will likely close the position if CL clears $99 again. Otherwise, I'm going to focused on looking for setups that could profit on the next leg of the bull rally.

Comments on a few other charts.

I think BTC is more important in the grand scheme of things, but right now Ethreum is leading. If this can crack the $1700 area that is a massive wall of resistance, it will suprise even many bears who like me, expected a rally. It won't suprise me because I understand what crack-addled specualtion can do to asset prices, and how junkies cannot quit. I also won't be shocked if the rally dies there and signals this bull run could terminate much earlier than I anticipate.

I'm not in biotech at the moment. I want to show a couple of lines here to give my thinking. The line on IBB isn't clean, but it illustrates how prior rallies all fizzled after moving a little above this trendline. Right now, it looks like IBB and, much more cleanly XBI, could be ready to push off this line. Conversely, breaking lower would also be a sign the bear market rally could be terminating.

A 1 percent gain in XLC will complete the small base that points to potentially 10 percent more upside.

Churn and Burn

I still think a rally is in the cards, in part because the bears keep piling in. But since this is a bear market, the longer a rally takes, the higher the probability that the rally peak is in. I don't think that it is in yet, could be, but thinking more that the stretch targets become less likely the longer it takes a rally to get going. ES is already back to 3820 area it was battling at last week. If it fails, a trip back to 3700 is in the cards.

Junk bonds tracked with equities, but bonds are down overall.

Ugly candles on biotech funds today.

A Whole Lot of Work for Nothing

Very frustrating days in the markets. I did very well with trades during the rally, gave back some. Since then seesaw up and down days. Until I see the long-side totally wrecked, I will keep sniffing out long plays.

SMH is flirting with going green on a horrible day. Looks like a high probability winner if the market pops.

IBB broke a similar horizontal as the one that XBI is holding below. I view XBI as the leader. I don't like this trade as much as in June because it has much more potential downside if the market sinks, but the relative strength could unleash a still more powerful rally.      
I'm still positioned long on TLT. Added a little near the lows today.

XLC is the most depressed piece of trash that I'm willing to take a flyer on. August $60 calls look good if can get in cheap. They remain horribly illiquid. Direct play via NFLX and META more expensive, but very liquid.

On the downside, oil and related stocks remain my favorite, but as I discussed earlier today, the correlation between Nasdaq and oil gives me pause. The stock market needs something to send oil plummeting by itself, like peace in Ukraine, and that seems impossible right now. With oil following Nasdaq or vice versa, I expect a rally in stocks could pull oil higher. Perhaops soaring TLT could split the difference by signaling both a recession threat to hurt oil and the need for the Fed to slow its hiking speed to benefit stocks.

Bought TLT and SMH

Initiated a new long position on TLT and added more to the semiconductor long.

Biotech remains strong.

Biotech Symmetry Trade Was a Winner

If it fully plays out, it should run for a few more days. I think IBB could get to around $130 before hitting some resistance.

There is a small gap around $87 for XBI.

Wild Day; Watch HY Credit Spreads

Still long XBI, IBB and ILMN. Still long XLC calls. Went long META calls and EWG calls. Added more JPY calls. Added HG calls (copper futures). Still holding GE calls (Eurodollar futures).

Traded QQQ calls intraday.

Closed more TLT calls, still have some ZB calls.

Closed USO puts. Got out of long USO daytrade.

The next line in the sand is 3850 for the S&P 500 Index. Get above that and the rally can start taking shape, but there could still be a smackdown. The fact that JPY hasn't moved is not good, nor is the breakdown in the euro. I don't think those are necessary components for a rally, but they are potential nuclear bombs for the market should they collapse. The worst thing I see is HYG and credit spreads, also a big nuclear warhead hanging over the market. HYG was up today, but since treasuries popped far more, that indicates high-yield spreads are blowing out. My take is a rally requires those credit spreads to drop, then the trap door will slam on the bears. If high yield spreads keep rising and HYG breaks down, it'll be time to dump longs and go short for a plunge-o-rama.

Biotech Update

Moved a horizontal on IBB.

If Biotech Can Rally

Biotech has a symmetrical setup. If this pattern breaks out here, it could set up an inverse H&S down the road, which would target a roughly 30 percent gain from here into August and early September. If it goes down next week, the pattern is busted. It could take longer to develop if the market chop or sinks to new lows.