Shares of some large-cap biotechnology stocks such as Biogen (BIIB) rallied nicely Wednesday, resulting in technically significant moves that could allow active investors and traders to hop on board BIIB stock for a momentum play.
While the broader stock market saw some key bearish reversals from last Friday into Monday and Tuesday of this week, larger biotechnology shares barely budged and for the most part retained their bullish posture.
This type of relative strength in a high-beta group of stocks is notable, and trend-followers should respect it. While the concept is simple, staying the trend can be a daunting task for traders and investors alike — particularly in somewhat more volatile segments of the markets where more room for error must be given to price swings before calling a trend “broken.”
Thus, to gauge directional strength of a group of such stocks, it often helps to look at them on a relative basis vs. the broader stock market.
IBB Stock Charts
On the first chart below, I divided the iShares Nasdaq Biotechnology ETF (IBB) by the S&P 500 ETF (SPY). The result on this so-called “ratio chart” is that the IBB (relative to the SPY) broke out of a bull flag formation late last week, and with Wednesday’s rally bumped up to lateral resistance dating back to March. The picture is constructive until a bearish reversal rears its head.
On the chart of the IBB itself, note that with Wednesday’s 2.83% rally, the fund broke past multiweek lateral resistance to fresh all-time highs. Also note the quick bullish reversal from Sept. 16, where the index held support.
All of this can also be filed under “not bearish” … at least until the trend reverses.
BIIB Stock Charts
On the single-stock front, BIIB stock also flashed a bullish reversal move on Sept. 16, right at its 100-day simple moving average (blue line). Wednesday’s 4.23% rally, which came on slightly above-average volume, pushed the stock right back to its year-to-date lateral resistance line.
The more often a line of resistance gets tested, the weaker it gets, and the more powerful the ultimate breakout move is.
While I am not here to proclaim an entirely new major bull leg for biotechnology stocks given the big multiyear run, the fact that BIIB’s lateral resistance around the $347-$350 area has now been tested six times since February does lead me to believe a breakout move is in order sooner rather than later.
Thus, active traders and investors could look to buy BIIB stock on a break above $347 for an initial move toward the $370 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
