“…provided the secondary reaction can be assumed to have run its normal course, which should be somewhere between 33 per cent and 66 per cent of the total primary advance attained since the last preceding important secondary reaction.”
Rhea, Robert. The Dow Theory. Barron’s. 1932. page 58.
In the case of the iShares Biotechnology ETF (IBB) “…the last preceding important secondary reaction…” was immediately after its inception. Customary for a top in the market is the creation of a new ETF or mutual fund that is supposed to take advantage of the gains in the sector. Unfortunately, IBB did nothing but go down after going public, declining –60.17% in the first year and a half. The subsequent rise was nothing short of spectacular, gaining nearly six times the 2002 low.
As of April 4, 2014, IBB has declined only –17.43% from the peak. Based on the parabolic nature of the rise, the work of Edson Gould seems the most appropriate tool for gauging the downside risk for IBB.
Based on the work of Gould, IBB has a conservative downside target of $150.85 or –45% from the peak. The extreme downside target is set for $91.80 or –66% from the peak. We expect that $150.85 can be achieved with little difficulty.