Early Session

What Happened Last Time … Won’t Happen This Time

We have four more trading days until the end of the Third Quarter. It’s unlikely that biotech (SPBIO) is going to make a new quarterly high.

This morning’s early action has LABD (3X inverse SPBIO) essentially unchanged to slightly lower; higher for SPBIO.

The weekly chart of SPBIO, above, has been inverted to mimic the inverse fund LABD … but without the tracking (bias) errors.

The “tight” area of action has been expanded in the next chart:

We can see the wide, high volume bar from the week of 8/27, is being tested by the subsequent weeks and their upward action.

This is normal market behavior that has probably been repeating itself since the buttonwood tree.

Alternating Action:

The difference this time around, we’ve already had the ‘low to upward thrust’ (for LABD) that was negated last week with a test.

That test has now reversed as seen on the 4-Hour chart (inverted SPBIO) below:

Both downward thrusts (September 17th, and 23rd) finished the day at or near their session lows.

The ‘rule of alternation’, from Prechter’s Elliott Wave discussions, essentially says that; what happened last time, will not happen this time.

That leaves two scenarios for SPBIO and LABD.

Scenario, No. 1

SPBIO reverses from here and goes on to make new daily, weekly highs.

Scenario, No. 2

SPBIO continues its downward reversal into the next leg lower; potentially to the Fibonacci projection target (not shown) of 161.8%.

That would put SPBIO, at or near the 3,873 level … a decline of nearly 62%, from last Friday’s close.

Force Index:

Since the inverse fund LABD is heavily traded (2mil – 3mil, shares per day), we can use it as a good indicator of professional trader commitment

I say ‘professional’ because, as incredible as it may seem, the majority of market participants (the amateurs) do not understand or can’t grasp the concept, the big money is made on the downside.

The trading books that regale stories of massive gains, were typically trades to the downside … probably the most famous of which, was Livermore’s well documented short position during The Panic of 1907.

I’ve even talked to a former broker (for a firm that has 15,000 locations nationwide) who asked me when I was discussing the markets (and I quote): “What’s an inverse fund?”

I kid you not.

As touched on yesterday with Random Notes, the level of complacency, stupidity and ignorance has reached levels that are not going to be repeated in our lifetimes.

Market participants are either going to be wiped-out … or they’re going to get very smart, very fast.

I’m personally going with the ‘wiped-out’ scenario as it’s extremely difficult to come up to speed on a complicated topic (reading price action) while your account is being decimated.

Which brings us to the Force-Index chart of LABD:

This chart’s a little different than the rest.

The Force Index section (the lower panel) has been expanded to show the nuances of thrust action.

Even all the way back to the major thrust lower on August 23rd, we can see, downward thrust energy has been dissipating.

Recently, as shown with the blue arrow, downward thrust has evaporated altogether.

Summary:

It appears from the 4-Hour chart of LABD, we’re potentially at a major point of inflection (not advice, not a recommendation).

The rest of the indices (except the miners) are at or near their all time highs … with valuations (P/E ratios) stretched to the highest on record; going all the way back to 1962, if memory serves.

SPBIO is the only major index that’s about to post three down quarters in a row.

Obviously we’re short this sector via LABD (not advice, not a recommendation) with the understanding that anything can happen.

This market (SPBIO) along with the others could reverse and move to new highs.

However, at this juncture, it looks like the air’s coming out of biotech … slowly, at first.

Stay Tuned

Note:  Posts on this site are for education purposes only.  They provide one firm’s insight on the markets.  Not investment advice.  See additional disclaimer here.