Some of the selloffs in the market in recent months have been gut wrenching.
One selloff that has been particularly rapid is the decline in the shares of Illumina (ILMN), which has shed $105 in less than three months! There is an old saying about not trying to catch a falling knife, but it may be time to practice our knife skills.
In this weekly chart (above), we can see that ILMN broke two key support areas as it made its way lower. At the moment, ILMN is testing its 2014 lows.
The Relative Strength Index (RSI) (an overbought/oversold indicator) is at its lowest level since late 2011.
In this daily chart (above), the selloff looks more dramatic. Also the RSI readings are down at 20, a level considered by most chartists to be oversold even for a downtrend.
While an oversold market can get more oversold, these extreme readings suggest that at least a relief rally is possible.
In this last chart (above), we show the weekly candlestick chart of ILMN. While we haven't finished the week, the latest entry on this chart shows a possible "hammer" formation.
Hammers are bottom reversals. The candle displays a lower shadow or the extreme low. We still have to get through Friday, but the chart shows a rejection of the lows.
What should traders do with ILMN here? With very low oversold readings and a possible reversal pattern from the candle chart, we would at least cover shorts. If the hammer is confirmed and prices start higher next week, then aggressive traders could probe the long side.