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$BTK Forming Bottom?

09/29/11 02:12:28 PM
by Chaitali Mohile

The bearish rally of the biotechnology index is consolidating. Will the index initiate a fresh bullish move?

Security:   $BTK
Position:   N/A

Before undergoing a strong corrective rally, the biotechnology index ($BTK) formed a series of lower lows and lower highs, which was an indication of upcoming weakness in the index. A developed uptrend began descending in May, indicating the possibility of a trend reversal. During the formation of lower lows and lower highs, the uptrend slipped below 20 levels with equal buying and selling pressure. As a result, the bears rushed to take over the existing rally. Eventually, $BTK witnessed huge selling pressure at the 1450 levels under the resistance of the 50-day moving average (MA). The length of the bearish candles (red) in Figure 1 gradually increased in size, highlighting the increasing strength of the bears. The declining rally breached the long-term moving average at the 200-day MA support, and the index plunged to 1050 levels.

Meanwhile, the relative strength index (RSI) (14) dipped to an oversold region, and the negative moving average convergence/divergence (MACD) (12,26,9) underwent a bullish crossover in negative territory. In addition, a downtrend that developed during the bearish rally reached highly overheated levels.

Graphic provided by:
Therefore, all three indicators suggested a bullish trend reversal rally with support at the 1050 level on the price chart. Considering these indications, $BTK initiated a pullback rally, forming higher lows and a few higher highs. However, the upper range of the rally (the higher high) turned horizontal, forming a short-term ascending triangle at the bottom. The triangle in Figure 1 can be considered to be a bullish trend reversal formation as the downtrend is ready to reverse. But the buying (green line) and selling (red line) pressure in the average directional index (ADX) (14) are converging, suggesting a range-bound rally within the triangle. The RSI (14) was reluctant to surge above the 50 levels, thus confirming the tricky price rally in the next few sessions. The declining 50-day MA would add pressure if $BTK tried to undergo a bullish breakout from the ascending triangle. Thus, the index would move in a very narrow range between the seller's line (upper trendline) and the ascending lower trendline -- the buyer's line.

Graphic provided by:
The weekly time frame in Figure 2 would make the medium-term picture clear for $BTK. The index has formed a hammer candlestick pattern to stop the turbulence. The blue box in the price chart shows a group of candles; the first red doji candle is the hammer candlestick, indicating the reversal rally. The new price action moved sideways instead of shooting upward. The consolidation formed a bottom, indicating no additional loss for $BTK. The candles other than the hammer candlestick are long upper shadows. Although those candles are bullish, they were unable to sustain at their highs. These are the signs of weakness, showing significant volatility in the particular rally.

The downtrend in the ADX (14) in Figure 2 is not reflecting any reversal possibilities. The RSI (14) is fluctuating between 30 and 20 levels, which means the direction of the rally is unknown. The negative MACD (12,26,9), is indicating a bearish momentum. In such a scenario, $BTK is unlikely to surge above the upper consolidation range at 1200 levels (approximately).

Graphic provided by:
Long-term traders can refer to my article on $BTK from April 2011 (Figure 3). The ascending channel mentioned on the monthly time frame will give you proper guidance for the support and resistance of the future rally. Currently, the index is standing at the support of the lower trendline.

$BTK would most likely not initiate a bullish rally in the near term.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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