The rally on Tuesday was primarily fueled by the Biotech sector.  Take a look at the chart of IBB (NASDAQ Biotechnology ETF), which has been on a solid tear higher since 2009 along with the balance of the equity markets.  Thus far in 2014, though the IBB has risen a whopping 21%, far exceeding the SPX’s 8.3% rise.  Once you take a look at the component companies within IBB it is much easier to see what keeps this ETF pumping.  GILD (Gilead Sciences) has risen 41% since January 1, 2014, ITMN (InterMune) has zipped from $10.95 in February (2014) to $73.50 on Monday since Roche has agreed to purchase the company for $8.3 billion. ICPT (Intercept Pharmaceuticals has risen over 350% on news of several of its drug trials being very positive.  Currently there are 121 companies within the IBB, the top 10 holdings by weighting are GILD 9.48%, CELG 8.75%, AMGN 8.33%, BIIB 7.69%, ALXN 6.72%, VRTX 4.55%, REGN 4.06%, ILMN 4.03%, MYL 3.49%, and BMRN 2.22%.

Then there are the huge winners not within this ETF such as Puma Biotechnology (PBYI), which soared over 200% on July 23^rd from $59 to $243 and has now reached a new all time high on Tuesday at $279.40.  This sector is clearly on fire and for good reason.  There are numerous breakthroughs in treatments for cancer and other life threating illnesses.  But before you rush out to include the biotech sector in your portfolio take a step back and realize that many companies have been one hit wonders so to speak.  Rising parabolically on the hope of a drug approval only to be driven to bankruptcy when it doesn’t win FDA approval or fails within one of the many trial stages.  The Biotech sector has always been one where implied volatility usually remains high and for good reason.  Today’s stars could be tomorrow’s losers.

Technically, the IBB and on a broader scale the biotechnology sector has also been pushed into extreme overbought readings.  More specifically, though here are some interesting observations from Weeden’s Michael Purves: The IBB has pushed to new highs but basically continues to be held in an area of resistance that coincides with the March 2014 high.  Mr. Purves continues to be concerned with the flows that continue to come out of the sector with the shares of the IBB outstanding trending down since March.  Also, the question remains as to how much of the current rally is due to short covering as the short shares outstanding as of the last reading remains at record highs.  Since the data does lag somewhat the current rally could be a sign of a last short squeeze.

Coupled with the technical readings from the stochastic oscillator, which closed on Tuesday at +99.03, which is extremely overbought.  The RSI EMA oscillator has again moved into extreme overbought readings finishing Tuesday at +75, which remains below the March high at 88.95, which gives some credence to the short covering thoughts pushing the IBB to new highs.

The strong rally within the biotech sector has also added strong upside momentum to the rallies in the RUT and NDX.  The RUT rallied over 1% on Tuesday and has climbed an impressive 6.5% since August 1^st and now is within striking distance of the elusive 1200 level and its all time high at 1213.55.  The NDX won’t be outshined here as this index has risen 5.6% since August 8^th and to a new 14 year high yesterday.  The technical picture for all the broader indexes remains extremely overbought but that hasn’t stopped the upward progress.

The warning signs remains flashing read though, as the SPX and DJIA pushed to additional new all time highs under very light volumes.  This is not indicative of broad participation but more likely being pursued by the increased number of algorithmic traders.  Volatility remains at historic lows, which again is a sign of increased complacency.  These are interesting times to say the least, as it appears nothing will deter the bull from pushing higher.  However, don’t be lulled into ignoring the increased warnings.  At a minimum a correction of 10 to 15% of the rally off of the April 2014 lows would not be out of the realm of possibilities.  Once the markets do turn I suspect it will not remain ‘fair and orderly’ as the tide of late buyers turn into a tsunami of sellers.

My primary trading platform continues to be the DTS Falcon and Eagle from Indicator Warehouse.  I use the ATR indicator in tandem with the ‘birds’ to generate buy and sell entry and exit levels.  I will be looking for stronger “sell” signals from the ATR to indicate a correction is underway.  Click here for additional information on DTS platforms and here for additional information on indicators.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

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