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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • Biotech Crash -- How Long Will It Last?

    The market croaked Wednesday as the very weak Durable Goods report gave investors more reasons to sell. The biotech and semiconductors bore the brunt of the selling as both were down over 4% on the day. The market internals were 3-1 negative but not bad enough to suggest that the selling is over.

    A weaker than expected final reading on 4th quarter GDP Friday could give investors more reason to sell. This week will add a few more bricks to the wall of worry that I discussed in Friday's Why Building the Wall of Worry Is Bullish. Wide swings in the Durable Goods are common as it was down 3.7% in December but up 2.8% in January, so the 1.4% drop in January is not a reason to turn negative on the economy.

    So, what's next? The S&P futures are down again in early trading as they are getting closer to next support in the 2020 area. Many are watching the March lows so they may need to be broken before the pullback is over. The new weekly highs in the NYSE A/D line do not yet warn of a major correction as I noted in Tell Tale Signs of a Correction. The daily A/D lines are at or below their WMAs with key support at the February lows.

    The biotech stocks are now getting much of the attention as some are wondering if the multi-year run in this market leading group is over. In 2014, the biotech stocks topped in February and the ensuing decline shook many out of this volatile sector before a 70% rally.

    So, what about this year? How far will a leading biotech ETF drop and how long will the decline last? Let's take a look.

     

     

    Click to Enlarge

    Chart Analysis: The monthly chart of iShares Nasdaq Biotechnology (IBB) shows a potential reversal in March after it reached a high of $374.97, which was just below the starc+ band at $381.58.

    • The monthly support from February is now at $305.
    • The uptrend that goes back to the early 2014 lows, line a, is now at $279.
    • The rising 20-month EMA is at $266.05.
    • Based on current data, the 2nd quarter pivot will be $338.
    • The monthly relative performance looks ready to make a new high again in March.
    • The RS line has been in a strong uptrend since early 2013 and is well above its rising WMA.
    • The monthly OBV dropped below its WMA in December before surging to the upside.
    • The OBV will make a new high with a higher close in March.
    • The OBV has good support now at line c.

    On the weekly chart of iShares Nasdaq Biotechnology (IBB) I have highlighted the correction that occurred in 2014.

    • This correction lasted eight weeks as it dropped IBB 24.6% from its high.
    • The correction low in 2015 occurred on April15.
    • IBB came close to its weekly starc- band on several occasions.
    • The seasonal tendency is for biotech to top out in January and then bottom on June 20.
    • The rising 20-week EMA is at $322.18 with the weekly starc- band at $310.99.
    • This zone is a likely downside target with more important support in the $290-$300 area.
    • The upper trading channel (line d) and starc+ band were tested two weeks ago.
    • The weekly RS line has turned lower but did make a new high with prices.
    • The RS line has good support at the uptrend, line f, and its WMA.
    • The weekly OBV broke through resistance, line g, at the end of February.
    • There is resistance now in the $355-$360 area.

     

     

    Click to Enlarge

    Regeneron Pharmaceuticals (REGN) moved above its WMA two weeks ago before reversing this week.

    • There is next support in the $437 area with the rising 20-week EMA at $417.19.
    • The uptrend from the 2014 lows, line a, is in the $390 area.
    • The weekly starc- band is now at $380.51.
    • The weekly relative performance did confirm the recent highs and is well above support at line b.
    • The RS analysis of REGN was featured in last week's trading lesson.
    • The weekly OBV broke its downtrend, line c, three weeks ago, but it did not confirm the recent highs.
    • There is initial resistance now in the $470-$475 area.

    Gilead Sciences (GILD) held up better than most biotech stocks on Wednesday as it was down just 1.55%.

    • The weekly chart shows a narrow range recently as the quarterly pivot at $99.01 is being tested.
    • A weekly close under $95.81 is likely to trigger heavier selling.
    • The weekly starc- band is at $87.70 with the uptrend just below $85.
    • The weekly RS line has formed lower highs, line f, as it has been diverging from prices.
    • The RS line has important support now at line g, which, if broken, would be negative.
    • The weekly on-balance volume (OBV) formed a negative divergence, line h, at the October high.
    • It shows a pattern of lower highs as it has stayed below its WMA.
    • There is long-term OBV support at line 1.
    • There is first resistance now at $105.71 and a close above $108 would be positive.

    What it Means: I would look for the correction in iShares Nasdaq Biotechnology (IBB) to be shorter than it was in 2014, maybe only six weeks.
    Would look for signs of a panic low in the $318-$322 area but it could get down to $310.

    For Regeneron Pharmaceuticals (REGN), the support in the $420-$425 area is likely to hold, which is over 6% below current levels. I would not want to see a close below $383.

    I expect the selling to increase in Gilead Sciences (GILD) before the correction in the biotech sector is over. This is because of the weak readings of the technical studies as it has not been a market leader since December. Celgene Corp (CELG) and Illumina, Inc. (ILMN) also look vulnerable.

    How to Profit: No new recommendation.

    Due to unforeseen circumstances, there will not be a Week Ahead column on Friday, March 27, but publication will resume on April 3.

    Here are some of Tom's most popular recent articles:

    The Best of Barron's New Year Picks

    The Nasdaq 100's Most Overbought

    Leaders and Laggards on IBD's Top 50 List

    Tags: IBB, REGN, GILD, CELG, ILMN
    Mar 27 8:06 AM | Link | 1 Comment
  • 4 Stocks Squeezing The Short Sellers

    The stock market sagged in late trading pushing the S&P 500 and Dow Industrials down about 0.60% for the day. The small-cap S&P 600 did manage a slight gain while the sharp rise in New Home Sales pushed the iShares US Home Construction ETF (ITB) up 1.16% for the day.

    The short-term technical studies are declining so a further decline is possible over the short-term as the major averages could drop back to their 20-day EMAs.

    The improvement last week in the technical studies, including the upside breakouts in the OBV for both the PowerShares QQQ Trust (QQQ) and iShares Russell 2000 (IWM), indicates a further correction will be well supported.

    A stronger rally is likely to cause more pain for the short sellers who have been bucking the market's overall trend in 2015. The most recent data shows that some traders have been forced to cover their positions. The short interest in Target (TGT) has declined 18% from February 13 to March 13, as the stock has risen 7.8% during the same period.

    A look at the charts of four stocks with high short interest can help you identify levels at which those on the short side may to forced to cover.

     

     

    Click to Enlarge

    Chart Analysis: Gamestop Corp. (GME) made a low of $31.40 on January 12 and closed Tuesday at $40.91, which is a gain of over 30%.

    • At the end of December, there were 51.8 millions shares sold short.
    • As of March 13, which is the latest reporting period, there were 47.2 million shares sold short.
    • The short ratio is now 44.6, so at the average volume, it would take 44.6 days to cover the short position.
    • The chart shows that the quarterly projected pivot resistance at $41.22 has stalled the rally so far.
    • The upper boundary of the trading channel, line a, is now in the $44.50-$45 area.
    • The daily relative performance broke through resistance, line c, in early March.
    • The RS line continues to form higher highs, consistent with a market leader.
    • The uptrend in the OBV, line e, is more shallow, but it is still positive.
    • The 20-day EMA and initial support is now at $39.81.

    Textura Corp. (TXTR) is a $683 million application software company that was up 0.75% Tuesday, even though the overall market declined.

    • At the end of November, 7.4 million shares had been sold short and this has changed little as the short interest is now 7.3 million shares.
    • It has a short ration of 38.7.
    • The stock has gained 12.9% during this period.
    • The chart shows next resistance in the $29 area.
    • The RS line is still in a downtrend, but it did move above its WMA last week.
    • The daily OBV looks very positive as the several month resistance, line h, was overcome in February.
    • The OBV is well above its strongly rising WMA.
    • The 20-day EMA is at $26.20 with the monthly projected pivot support at $25.24.

     

     

    Click to Enlarge

    Rouse Company (RSE) is a $1.15 billion dollar property management company that has a yield of 3.6%.

    • Since the end of February, the short interest has risen from 6.17 million shares to 6.38 million, an increase of 3%.
    • It has a short ration of 33.
    • The stock is up 15.4% so far in March, suggesting those on the short side are now feeling some pain.
    • The daily RS line broke its downtrend, line a, in late February and then moved above its WMA three days later.
    • The RS line and its WMA are both rising strongly.
    • The daily OBV has also broke through its resistance at line b, and is acting stronger than prices.
    • The strongly rising 20-day EMA is at $18.80, which should hold on a pullback.

    HHGreg, Inc. (HGG) is a $176 million electronic retailer that bottomed in late January at $5.03 and is up 26.6% from the low.

    • At the end of January, the short interest was 3.9 million shares and it has now risen to 4.1 million shares.
    • The short ratio is now 39 as 37% of the stock's float has been sold short.
    • The daily chart has next resistance at $6.80-$7.00, line c.
    • There is further resistance in the $7.60 area.
    • The relative performance has just broken its steep downtrend, line d.
    • The daily OBV has been rising since the January lows and has just broken through near term resistance.
    • There is initial support at $6.15 with further in the $5.80 area.

    What it Means: As I have mentioned before, when you are looking at a stock to buy, it is also a good idea to look at the short interest as it can often provide fuel that will support your bullish outlook for the stock.

    I have no current recommendation but Gamestop Corp. (GME) and Rouse Company (RSE) would look the most attractive on a pullback.

    How to Profit: No new recommendation.

    Here are some of Tom's most popular recent articles:

    The Best of Barron's New Year Picks

    The Nasdaq 100's Most Overbought

    Leaders and Laggards on IBD's Top 50 List

    Tags: ITB, GME, TXTR, RSE, HGG
    Mar 26 10:25 AM | Link | Comment!
  • One Industry Group Still Correcting

    Stocks sagged into the close on Monday, which after last week's gains is not surprising. The market internals were positive even though most of the major averages closed with slight losses. The exception was the iShares Transportation ETF (IYT) as it was down 1.93% on the day.

    This will give the market bears some more ammo, but as I noted on Friday, keeping investors on edge stops the market from getting overbought too quickly and helps keep the rally intact. The next concern on the horizon is the start of earnings season that officially kicks off on April 8.

    The weakness in the transportation stocks could be in reaction to the firming oil prices as crude oil is almost $5 above last Monday's lows. For the past month, I have been recommending that investors use the correction to buy (Hope You Patiently Bought the Dip). Given the new highs in the NYSE A/D line, I think this is still the correct strategy.

    However, corrections are often quite complex and the weakness in the airline stocks Monday suggests that their correction is not yet complete. The charts indicate that you should make a slight change in our strategy.

     

     

    Click to Enlarge

    Chart Analysis: The Dow Jones Airlines (DJUSAR) closed above its downtrend, line a, last Monday suggesting that the flag formation had been completed.

    • The daily chart shows that an LCD sell signal was triggered with Monday's close.
    • This is a short-term negative, suggesting that it could pullback to the 258 area, which is about 2% below Monday's close.
    • The upside targets from the flag formation and the 127.2% Fibonacci retracement targets are in the 286-290 area.
    • The former downtrend and daily starc- band are in the 252 area.
    • The relative performance does appear to have completed its correction as it rallied from support, line c, and moved above its previous high.
    • The volume was very heavy last Friday.
    • The daily OBV overcame its resistance (line d) on March 13 and looks very strong.

    United Continental Holdings (UAL) has had a weaker rally from the lows as it formed a doji at monthly pivot resistance ($70.35) last week.

    • A LCD sell signal was triggered on Monday as UAL closed back below its flat 20-day EMA.
    • There is next support at $66.50-$67 with more important at $64.50, line e.
    • The daily relative performance has only rallied weakly and dropped Monday below its WMA.
    • A drop below RS line support at line f, would be a sign of further weakness.
    • The daily OBV just made it slightly above its WMA on the recent rally.
    • The downtrend, line g, was tested before the OBV turned lower.
    • The OBV shows a pattern of lower highs, line h, which is not a sign of strength.
    • UAL needs a close back above $71.40 to turn positive.

     

     

    Click to Enlarge

    Alaska Air Group (ALK) has had a much more impressive rally from the recent lows at $63.40.

    • With Monday's close, ALK had gained 6.4% as the daily starc+ band was tested last week.
    • The early March high and the 20-day EMA are at $66.35.
    • The daily starc- band is at $65.27 with the monthly pivot at $64.20.
    • The daily RS line has turned lower and is now testing its rising WMA and support at line b.
    • The daily OBV decisively broke its bearish divergence resistance, line c, on March 10.
    • The weekly OBV (not shown) is above its WMA.
    • A daily close above $69.42 will reassert the uptrend.

    American Airlines Group (AAL) had a very sharp rally after breaking its downtrend, line e, last Monday.

    • The daily starc+ band has been tested over the past three days with the weekly at $58.83.
    • There is first good support now in the $52.30-$52.50 area.
    • There is more important support at the sharply rising 20-day EMA at $51.47.
    • The daily RS line bottomed out in early March (line g) and turned positive when resistance at line f, was overcome.
    • The volume has been very strong on the rally as it surged through the resistance at line h.
    • The weekly OBV (not shown) has already made a new high.

    What it Means: The short-term action of the airline industry group and these three stocks makes a pullback likely over the near term. United Continental Holdings (UAL) does the look the weakest and it looks the most vulnerable.

    Therefore, would close out longs in UAL for a small profit and would look to buy American Airlines Group (AAL) on a correction. Also, I will change the open order for Alaska Air Group (ALK).

    How to Profit: ForAmerican Airlines Group (AAL) go 50% long at $52.48 and 50% long at $51.62 with a stop at $49.23 (risk of approx. 5.4%).

    For Alaska Air Group (ALK) go 50% long at $66.37 or better and 50% long at $65.51 with a stop at $63.18 (risk of approx. 4.2%).

    Portfolio Update: Should be 100% long at United Continental Holdings (UAL) from March 10 at an average price of $65.10, close out now (Tweeted before the opening).

    Tags: IYT, UAL, AAL, ALK
    Mar 25 10:59 AM | Link | Comment!
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