Why I’m bullish on the BBH

Confirming yesterday’s gains was a rise in turnover across the board. Total volume in the NYSE increased by 28%, while volume in the Nasdaq was 27% higher than the previous day’s level. The gains on higher volume made yesterday a bullish “accumulation day,” which followed on the heels of the prior session’s “distribution day.” Volume often rises on the last day of the month due to mutual and hedge funds closing positions for “window dressing,” but it the session nevertheless showed institutional accumulation. Market internals were solid as well. In the NYSE, advancing volume exceeded declining volume by a margin of 5 to 1. The Nasdaq’s ratio was positive by just over 2 to 1.

One sector ETF that has begun to show relative strength by outperforming the
broad market is the Biotech HOLDR
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PowerRating). Although it has been in a downtrend since November of 2005, it has actually rallied while the market sold off over the past several weeks. Since the broad market selloff began on May 11, the S&P has lost 3.8% and the Nasdaq has fallen 6.1%. BBH, however, has gained 1.8% during that same period. In fact, BBH is the only ETF in the U.S. markets that has gained more than one percent since May 10. As annotated below, the daily chart of BBH is also showing signs of a potential trend reversal:

The biggest thing we like about the BBH chart is the “double bottom with undercut” that it recently formed. When it tested its May 2 low on May 24, notice how BBH traded nearly a point below that prior low (illustrated by the horizontal dashed red line). This is known as an “undercut” and is bullish because it washes out the remaining sellers who had their protective stop orders just below the prior low. Although a double bottom such as this often precedes a trend reversal, it is important to get confirmation of that reversal before buying. Confirmation must come in the form of a “higher high.” In this situation, it means BBH must rally above the May 9 high (circled in pink). As you can see, it initially probed above that high on May 26, sold off the next day, but then closed yesterday back above that level. Such action is bullish and should lead to further upward momentum. BBH is further aided by the fact that a break above yesterday’s high would also put it back above its 50-day moving average. Because the broad market remains weak, we would recommend reduced share size if buying BBH, but its relative strength makes it one of the less risky long setups out there. If buying BBH, consider a target of the 200-day moving average (the 185 area) and a stop around 172. A relatively wide stop is necessary due to the high volatility of BBH.

For the month of May, the S&P 500 lost 3.1%, the Nasdaq 6.2%, and the Dow 1.8%. That brought the S&P’s year-to-date gain down to 1.7% and put the Nasdaq at a loss of 1.2%. Based on May’s losses, what should we expect in June? Taking an updated look at the longer-term weekly chart of the S&P will help us see the “big picture” of what is happening:

The main focus in the coming month is on the former uptrend line that the S&P fell below on the week ended May 19. That uptrend line, which began with the low of March 2003, has become the new primary resistance level. Remember the most basic tenet of technical analysis is that a prior support level becomes the new resistance level after the support is broken. A good example of this is last week’s action, in which the S&P tried, but failed, to recover back above that prior uptrend line. Therefore, our overall bias on the broad market will remain bearish unless the S&P recovers back above that trendline. Presently, resistance of the prior uptrend is around the 1,288 level, although the 10-week moving average will also provide resistance just above that. If you look at the daily chart of the S&P, you will notice that the uptrend line also coincides with resistance of the 20-day moving average at 1,288. The 50-day moving average is at 1,296. As for support, the obvious level to watch is the 200-day moving average that the S&P bounced off of last week and again yesterday. The 200-day MA lies at 1,258. A solid close below the 200-MA would likely trigger significant downside momentum, but the market is likely to chop around for a while until that happens.

Short
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