Although the new year greeted stocks with a flurry of profit taking, not all sectors suffered equally. In fact, despite the drubbing, some sectors like biotech — and by proxy, the iShares Nasdaq Biotechnology ETF (IBB) — were able to climb back into the green by day’s end.
And don’t think the relative strength in IBB was a fluke. Quite the contrary — the biotech laden ETF outperformed the rest of the market with vigor all throughout 2013.
IBB finished the year up 65%, outdistancing the S&P 500’s 30% rise by a large margin. With the bulls seemingly unwilling to cast off this big winner of yesteryear it appears additional upside in the sector may be in store.
Traders searching for trade ideas in the space need look no further than its top three holdings: Amgen (AMGN), Celgene Corporation (CELG), and Gilead Sciences (GILD) which together account for about 25% of the fund’s performance.
Of the trio, GILD stock seems to have the most appealing setup. As the chart below reveals, the global biopharmaceutical company sits oh-so-close to yet another all-time high. With key resistance looming overhead at $76 and GILD stock having consolidated in a tight range over the past week, I suspect a breakout in Gilead Sciences is close at hand.
To exploit GILD’s next advance, you could buy the Feb 75-80 bull call spread for around $2. This vertical call spread consists of buying to open the Feb 75 call while selling to open the Feb 80 call. The max risk is limited to the initial $2 debit and will be lost if GILD stock sits below $75 at expiration. The max reward is limited to the distance between strikes minus the initial debit, or $3.
To capture the entire profit, GILD would need to rise past $80 by expiration, which is certainly possible given the trajectory of Gilead’s uptrend in recent months.
If you’re looking for additional confirmation before pulling the trigger, consider waiting for GILD stock to trade above the $76 resistance zone.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.