logo Today’s installment from the series, Trading Lessons From A Hedge Fund Trader will focus on the ETF PowerShares Dynamic Pharmaceuticals Portfolio (PJP.NYSE) as per our reader’s request on the Free Stock Analysis For Your Portfolio service.

Evaluating an ETF is hard work because you have to look at the fundamentals and technicals of the fund’s largest holdings to really understand the fund. But you already know the way we work, you send us the picks and we analyze them for you.

Fundamental Situation

The PowerShares Dynamic Pharmaceuticals Portfolio (PJP.NYSE) is based on the Dynamic Pharmaceuticals IntellidexSM Index (Intellidex Index). The Underlying Intellidex Index is comprised of common stocks of 30 US pharmaceuticals companies.

The Top holdings of this ETF include Amgen, Gilead, Celgene, Eli Lilly, Johnson & Johnson, Pfizer and Merck. The stocks in this group benefitted from the Federal Reserve’s monetary policies and are behaving like stocks fueled by jet fuel. The ETF’s holding are red hot, but we all know that the current market’s price action is totally unsustainable.

PJP has a P/E of 22 with a yield of 1.24. The P/E is on the extreme side of value and the yield is on the low end for large money making machines. This is not a story about the fundamentals, this all comes down to the Federal Reserve’s monetary policy and their influence on the markets. They clearly want you in risk assets (stocks) and the charts of the ETF’s major holdings prove that point.

Technical Situation

Let’s take a look at the 9 year chart of The PowerShares Dynamic Pharmaceuticals Portfolio (PJP.NYSE). The ETF moved from $12.5 in 2009 to $47 in 2013. That’s a move of $34.50 or 276% in 4.5 years. Not too shabby now is it. That’s why people are attract to it, you get capital appreciation, a small dividend and the ETF is bullet proof, it just doesn’t go down.

Study the chart and you will notice 3 distinct market behaviors.

1. The 1st rectangle shows the normal market where it has natural ebbs and flows. That’s the typical healthy market and that’s how the market moves when it is left alone.

2. The 2nd rectangle shows the destructive nature of the Stock Market crash. That is also the behavior of a normal market, things that go up also need to go down.

3. The 3rd rectangle show the market that is fueled by FED’s unlimited balance sheet (markets on crack). It seems nice while the market goes up but the economy isn’t really getting better and the FED is pumping so much money into the markets that when the markets crack, it will be nasty.

Now study the picture below, it’s the Cliff Hanger game from the game show, ‘The price is Right’.

cliff hanger

Do you see the similarities? The game ends when the FED pulls the stimulus from the economy or when the little guy falls off the cliff. The only real difference is that you can see the end of the cliff in the Price is Right game but you have no idea where the end of the move comes in PJP.NYSE.

Learn this lessonIt doesn’t matter what you think about the fundamentals or the technicals, never trade countertrend to any stock who’s chart formation looks like the cliff in the picture above.

Let’s take a look at the daily chart for 6 months.

The stock price is steadily climbing on the 50 day moving average. The chart shows that the only thing to do is to hold your nose and go long. You’ll just to find a decent STOP point. You can use intraday techniques to get into this trade, that’s what I would do but I’ll save that for another day.

Now let’s add the FED day strategy to the equation. If you don’t know what that is, here’s the link to read up on it. It’s a good simple strategy from the Hedge Fund I worked for. You can use the HIGH and LOW price as an entry point and stop to go LONG and SHORT PJP.NYSE.

There is a short set up here but I only recommend that for the highly disciplined professional trader.

Conclusion

The truth is, PJP.NYSE scares me because it has all the characteristics of a stock that is IN PLAY.

The IN PLAY stock is great while it moves in your favor, but you have to use tight stops and be very careful when the stock runs away from you.

This stock reminds me about Nortel, the former Canadian darling while it went up and then it turned into a nightmare taking away all your paper profits on the way down.

Learn how to take partial profits on this stock and doing so will allow you to ride this trade risk free. The key to managing any position in this stock is to put the trade into risk free status as soon as you can and learn how to milk the big move holding only 1/2 to 1/3 of your original position. That will be explained in Profit Behind The Chart.

Using proper trading techniques will take out all the fear out of owning this stock.

You can either hold your nose and BUY PJP.NYSE as long as we continue to climb the 50day Moving Average or CLOSE above the HIGH of the Sep18 FED day bar of $47.40

We have a potential LONG and SHORT trade setup of The PowerShares Dynamic Pharmaceuticals Portfolio (PJP.NYSE).

If you would like to know how a Hedge Fund Trader would evaluate this stock, showing our specific trading levels for Entries, Stops and Targets, then click here to see how we Profit Behind The Chart.

You can read all the news about a company, perform all the fundamental and technical analysis on the stock, successful traders and investors know it all boils down to this, you must set up the optimal risk reward trading scenario (otherwise known as a game plan) that identifies specific trading levels for Entries, Stops and Targets so you can maximize profits while minimizing risk.

This is a cursory look at of The PowerShares Dynamic Pharmaceuticals Portfolio (PJP.NYSE) and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.

Originally published on BehindWallStreet.com