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Capitulation? Or a Bounce to Sell Into Now?

The iShares Nasdaq Biotechnology Index  (IBB) is emblematic of a risk-on environment, and closed below the 200-day moving average for the first time since 2012. The next level of support is around the 200 level.

A further breakout in the iShares Barclays 20+ Yr Treasury Bond ETF (TLT) would signal a continuation of a risk-off environment, as investors flock to safer instruments, pushing yields lower.

What to Look For When Determining Whether You Should BTD or STR

We will very likely get a bounce at some point in the next week. The question is, how do you know if it is just a bounce or if we have instead hit a short-term bottom and a new upend will emerge with staying power? Here are some signs to look for when searching for a bottom:

  • A distributive day based on breadth indicators as well as extreme volume would give credence to potential capitulation.
  • An up day that shows follow through and can sustain itself for more than two days.
  • Money coming back into biotechs as well as the Nasdaq and small-cap stocks.
  • 20-year Treasury bonds fading.
  • CBOE Market Volatility Index sliding back below 14.
  • A spike in the put/call ratio

Not all of these variables are necessary, but the more that do occur, the better the odds that a bottom is in before resuming a new uptrend.

The important thing to remember is that what worked in 2013 is not working this year. If you have not yet adapted your trading strategy you are likely struggling. But you can change that.

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