XBI – Be Careful With This Biotech ETF After Its Violent Breakout

by Serge Berger | January 14, 2014 9:00 am

Investing in biotech stocks isn’t for the faint of heart. A biotech company’s livelihood is often at the whim of an FDA decision, meaning traders have to react quicker than the ticker to avoid incurring larger-than-wanted losses on any given trade.

Of course, the upbeat side of being involved with biotech stocks (and even a biotech ETF) comes when a pick rallies hard in the desired direction.

And that’s exactly what happened last week. The SPDR S&P Biotech ETF (XBI[1]) rallied close to 18% last week, thanks mostly to a massive move higher in index component Intercept Pharmaceuticals (ICPT[2]). ICPT stock blasted higher by more than 500% last Thursday and Friday on the back of a successful trial for its liver disease treatment called obeticholic acid, or OCA.

Analysts were excited by the news, instantly flipping to “buy” ratings on ICPT stock and saying Intercept Pharmaceuticals could potentially be able to issue several blockbuster drugs on the back of the trial.

And the explosion in ICPT naturally lifted the XBI higher as well. Last week, the biotech ETF enjoyed gains of almost 18%.

What’s next for the XBI after this huge move in its component? Let’s take a look.

Keep a Close Eye on the XBI

On Monday, Intercept Pharmaceuticals began to consolidate its massive rally, as seen in the ICPT stock chart below.

icpt1 XBI   Be Careful With This Biotech ETF After Its Violent Breakout
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The XBI, which is an equally weighted exchange-traded fund, now has 5.71% of its assets allocated to ICPT as a result of Intercept’s spike. The biotech ETF will be rebalanced again on the third Friday of March … so until then, ICPT will remain the largest holding in the XBI unless it gives up a good part of its recent gains.

In terms of the technical picture, the XBI last week broke out past a multimonth resistance line around the $132 area … but the biotech ETF looks overextended in the near-term. In the near-term, some digestion must set in before better odds present themselves.

xbi daily1 XBI   Be Careful With This Biotech ETF After Its Violent Breakout
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If nothing else, traders and investors considering the XBI must be aware of what’s going on with ICPT, the largest holding of the biotech ETF.

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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here[4]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. XBI: http://studio-5.financialcontent.com/investplace/quote?Symbol=XBI
  2. ICPT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ICPT
  3. Beat the Bell: https://order.investorplace.com/?sid=FQ8104
  4. clicking here: http://www2.marketfy.com/l/15492/2013-10-08/5htq5

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