The S&P 500 Index is up 22% over the last year, while the iShares Nasdaq Biotech ETF (IBB) is up 42% during the same period. That's nearly double on a relative performance basis.
Over the last two months the move in the biotechnology sector has gone parabolic, fueled by a positive feedback loop of price and money flow momentum. But Friday's action in IBB may have given the first signal that the acceleration in the move is leveling off. While the fund was up 0.35% on the day, it closed 2.5% off its intraday high, creating a large dark candle on the daily chart. Volume was more than 125% greater than the 50-day moving average of volume.
There is little in the way of reliable trend lines or former support and resistance by which to track a parabolic run on a stock chart and moving averages have not had time to catch up with the price action.
A close eye on momentum is required to monitor the move. I use a combination of technical indicators to gauge price and money flow momentum and when they are moving in unison they are of particular importance. The Relative Strength Index is a common measure of price momentum and the Money Flow Index is a volume-weighted relative strength measure. Coordinated moves from extreme oversold or overbought levels can signal good trading opportunities.
The daily chart of biotechnology company Receptos (RCPT) shows the Relative Strength Index and the Money Flow Index simultaneously crossing below the 21-period average of the indicator that I use as a signal line and out of overbought zones. Moving Average Convergence/Divergence (MACD) has been in bearish divergence and early in today's session the stock price tested its 2014 high. A close in lower candle range suggests the stock may have further to pull back and would be a speculative short entry point.
Anacor Pharmaceuticals (ANAC) closed near its low Friday on a large volume spike. The Money Flow Index has been in a slight bearish divergence this month and last week the Relative Strength Index dropped out of a long-term overbought condition. MACD is making a bearish crossover. Anacor is another short opportunity after a daily close in a lower candle range.
While any short trade requires strict cover stops and careful monitoring, these are particularly speculative trades. Parabolic counter-trend trades are certainly dangerous, but at the same time can be extremely profitable.