Tuesday provided yet another odd day for stocks. The news that the European Union had approved a stimulus bill for Europe sent stock futures higher overnight and all four indices opened higher. The gains were pretty steady throughout the trading session, but some selling hit in the afternoon and the Nasdaq finished in the red. The Dow and S&P gave up a great deal of their gains while the Russell held on to most of its gains.
The final results showed the Russell gaining 1.33% and the Dow gaining 0.60%. The S&P gained 0.17% after being up more than 0.75% during the day. The Nasdaq finished with a decline of 0.81%.
The sectors were flipped to some degree on Tuesday from Monday’s results. There were seven sectors that moved higher and three that moved lower. The top performer from Monday, the tech sector, became the worst performer on Tuesday with a decline of 1.0%.
The energy sector was the worst performer on Monday with a loss of 1.66%, but it was the top performer on Tuesday with a gain of 6.15%.The communication services sector dropped 0.48% as the second worst performer while the financial sector jumped 1.97% as the second best performer.
My scans remained bearishly skewed on Tuesday night with 51 bearish signals and only four bullish signals.
The barometer dropped a little with those results, falling from -64.3 to -66.1.
One of the themes from last night’s bearish scan was on biotech stocks and ETFs. Three different biotech ETFs appeared on the list, but I felt the best risk/reward relationship was on the SPDR S&P Biotech ETF (NYSE: XBI). The fund is overbought on both its daily and weekly charts and the candlestick from yesterday formed a bearish engulfing pattern.
The weekly chart shows that both the weekly stochastics and the 10-week RSI are in overbought territory. When the two have been in overbought territory at the same time, the fund hasn’t stayed there for very long and it has dropped an average 0f 11.5% in the following weeks.
Buy to open the September 120-strike puts on XBI at $8.45 or better. These options expire on September 18. I suggest a target gain of 75% which means the fund will need to drop to $105.20. The fund was below $98 in June, so it won’t need to break that low to hit our target. I recommend a stop at $122.00.
— Rick Pendergraft
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