[Post Summary]The eye is not satisfied with seeing
—Ecclesiastes
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Here's insightful technical analysis on trading in the iShares NASDAQ Biotech ETF (NASDAQ:IBB). CNBC's Jim Cramer covered this ETF during his Mad Money show on January 15, 2009.
Jim's technician at TheStreet.com indicates the iShares NASDAQ Biotech ETF is a sell. Yet according to Cramer, the industry's fundamentals suggest IBB is a buy.
So, what are the Relative Strength Index (RSI) and volume indicating about the future trade in this ETF?
What possibilities does Elliott Wave analysis present?
Let's take a closer look...
RSI Analysis:
The velocity at which RSI fell during 2008 typically coincides with a move that is unsustainable. Contrast this, for example, to RSI coinciding with steep selling in IBB during 2002. Then, there was more effective balance in the trade, making the trend sustainable. Now, however, there's a striking imbalance. The sell-side has dominated. Typically, these are circumstances that are exploited by the long side of the trade. As such, then, the present RSI similarity to late-2001 probably can be ignored. The late-2002 similarity, on the other hand, might represent a more accurate view of worst-case possibilities in the iShares NASDAQ Biotech ETF over coming months. Despite RSI remaining on the sell-side (i.e. below 50) the price-RSI divergence you see at the November '08 bottom (relative to October '08) reveals technical strength underpinning the shares of IBB.
Volume Analysis:
One thing standing out is the relative contraction of IBB shares traded during 2008's second-half price collapse. Seeing how IBB more or less has traded sideways for the past five years ... and how each time IBB sold off during this time the volume of shares traded picked up, increasing from what registered during previous bouts of selling ... you begin to think selling in the iShares NASDAQ Biotech ETF has exhausted. This really becomes apparent seeing the contraction of shares exchanged as the IBB fell to bottom during the month of November, 2008.
Elliott Wave Analysis:
The shares of IBB have very much traded in harmony with the NASDAQ Composite ... but have held up much better. In light of the likelihood the broad-based NASDAQ Composite is slated to recover over months ahead (yet fall well-short of its 2007 peak in the process), IBB appears to be an ETF in a sector that could lead the way. An a-b-c Elliott "corrective wave" appears to be forming off the 2002 bottom ... where wave "b" — marking IBB's sideways trade of the past five years — may have just ended in November '08. Wave "b" completed or not, wave "c" might be expected to carry the iShares NASDAQ Biotech ETF upward to $110 or higher.
Conclusion:
The iShares NASDAQ Biotech ETF appears to offer present long-term oriented holders an opportunity to sell out at a price significantly higher than was reached in 2008. Those who are more trade-oriented should view IBB as representing a good long opportunity over the months ahead. Chances are, though, a favorable long trade might not develop promptly. On a pullback toward the $60 level ... all things remaining equal ... that's when I would look to be getting long.
Looking ahead and planning ... evaluating conditions as they develop ... and acting when everything proceeds as anticipated ... that's how patience pays in the stock market.
There's no perspective like this available on the web ... free of charge.
One thing you should keep in mind, too. As goes the stock market, so go 90% of all stocks that make up the stock market. You are well-advised to stay ahead of the curve...
—Tom Chechatka
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