Listen Up, Gang

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We have some homework to do regarding the biotechnology sector. The IBB (sector ETF) is coiled and so are a few individual names at first glance, such as BIIB and PCYC. I will be unlocking a whole host of screens inside The PPT to isolate the very best setups in this sector. Also note on the monthly of IBB how the uptrend has clearly persisted since 2009, leaving no doubt of higher highs and higher lows, unlike other sectors that breached their 2010 lows.

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The weekly chart above of the USO (ETF for crude oil) shows a clear falling channel since May that has taken price below its 2010 lows. However, the breach of last year’s lows was short-lived, and price is currently consolidating right were you would expect demand to come in. I know a bunch of traders who are keying off of crude for a direction about risk appetite in equities. Should the USO break up and out of this falling channel I believe it will be another sign of an intermediate-term change in character of risk appetite that we have not seen in many months.

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Ham has been upgraded to “Strong Buy” based upon valuation. As you can see above, it is just too cheap to ignore, now that the market has sufficiently discounted a double-dip recession.

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In addition to plethora of “shooting stars” printed on Wednesday, which I discussed last evening, 12631 member and long-time reader “Yogi and Boo Boo” points out the bearish island reversal on the SPY today too. Note the gaps on either side of yesterday’s shooting star candle, leaving that candle on the proverbial “bearish island.”

Now, I do not want to extrapolate too much from this other than short-term caution. Reason being, I believe a fair amount of charts have made considerable progress over the past week or so, and an orderly pullback would go a long way to firming up those charts even further. However, anticipating a bullish higher low is often a tricky proposition and is likely one of the easiest ways to permit your bias to destroy your capital. Thus, I am still left with being in a position of open-mindedness above all else.

The bears have a good opportunity here, and they are off to a solid start today. If this market is truly going to change character and break up and out of this range, the bulls had better stop these textbook bearish patterns in their tracks soon.

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The argument can be made that, for much of 2010 and 2011, the equity market has been following the moves of silver. While the jury is still out on how precise and lasting that relationship will be, I suspect that if silver rolls over for another major leg lower here, then stocks will have a tough go of it as well. Today, the SLV, ETF for silver, is seeing a nasty gap down after wedging higher for several weeks to almost touch to the declining 20-day moving average. Lots of eyes are on silver, so I expect continued headfakes. However, another leg down is a real threat and should be respected given the sloppiness and damage sustained on the chart.

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Wednesday’s final hour of trading saw enough of a fade in the rally to the point where plenty of “shooting star” candlesticks printed across the board on a variety of daily charts. In Japanese candlestick terminology, a shooting star looks exactly the same as an “inverted hammer,” in terms of outward appearance. However, a key difference is their respective placement on the chart. After a prior steep downtrend, the inverted hammer can actually signal a potential bullish reversal coming, whereas the shooting star is the term given to the same candle after a prior uptrend, and signals a potential bearish reversal.

A few elements of the shooting star (and inverted hammer):

1. The upper “shadow” (wick) of the candle is longer than the real “body” (the head of the hammer, so to speak).
2. There is no, or a very limited, lower “shadow,” below the real body of the candle.
3. A true shooting star (or inverted hammer) is going to “gap” away from the prior trend, via not overlapping the prior day’s price range.
4. The larger the upper shadow, the more prominence the candle takes on.
5. There must be an established prior trend in order for the a reversal candle to take on any type of significance.

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