Biotech HOLDRS Surge To Channel Resistance

02/27/06 08:24:37 AM

by Arthur Hill

The Biotech HOLDRS surged over the last two weeks, but resistance is near and Aroon is not impressed.

Security: BBH
Position: Hold

On the daily chart (Figure 1), the Biotech HOLDRS (BBH) formed a falling price channel over the last three months. Both the upper and the lower trendlines have been touched at least twice. The lower trendline provides support and the upper trendline provides resistance.

After a big move the last two weeks, BBH moved from the lower trendline to the upper trendline. This is a make-or-break point for the stock. A move above the upper trendline and February high (at the 200 mark) would be bullish and break the falling price channel. This would turn the medium-term trend bullish and higher prices would then be expected.

FIGURE 1: BIOTECH HOLDRS. BBH formed a falling price channel over the last three months.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

The surge over the last two weeks looks impressive, but the Aroon indicators are not impressed. Developed by Tushar Chande, the Aroon indicator is designed to define the direction and strength of a trend. I like to look at the position of Aroon-Up (green line) relative to Aroon-Down (red line). In general, the bulls are stronger when Aroon-Up is above Aroon-Down. The bears are stronger when Aroon-Down is above Aroon-Up.

As you can see, Aroon-Up remains relatively weak and still has some work to do for this trend to change. In addition, Aroon-Down remains well above Aroon-Up and above 50. This shows that a downtrend remains in effect and we should wait for Aroon-Up to make a move before considering a trend change valid.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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