Biotech stocks as a group have been on a nearly unprecedented run over the past few years, and despite a few bursts of volatility year-to-date, the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) continues to trend higher. Through the longer-term lens, the biotechnology group is overdue for a meaningful mean-reversion move lower … but in the near term, the IBB ETF looks ripe for one more push higher.
The sharp rise in biotech stocks in recent years has been well-documented and sucked in a great deal of quick traders as well as trend followers. While the former will change their minds daily about the direction and destiny of biotech stocks, the latter continue to enjoy one of the best-trending industries we’ve seen in a long time.
And, through the eyes of the latter group, the upward trend in the IBB ETF — the top-heavy ETF featuring biotechs such as Gilead Sciences, Inc. (NASDAQ:GILD) and Amgen, Inc. (NASDAQ:AMGN) — is not yet over and still can be bought on dips and breakouts.
To be sure, the rally in IBB has been steep — the biotech fund is up nearly 50% for the past 12 months alone. However, I’ve raised caution on biotech stocks this year, and it’s worth highlighting that while the IBB ETF is up about 20% year-to-date, performance is roughly flat since mid-March.And the going has been getting choppier.
IBB Charts
Keeping the trend following principle in mind, let’s look at the multiyear weekly chart of IBB.
The strong trend is not only apparent by the steep slope, but also by the fact that except for a couple of instances, the IBB has tracked higher along the upper Bollinger band (blue lines) for the majority of the past few years, and most of the time finding support at the middle (red line). In other words, the trend has not only been steep, but also mostly lacking volatility bursts.
As alluded to above, ultimately neither the slope, duration nor lack of volatility of this trend will maintain, and a real shake-out will occur. We are already seeing some negative divergences between momentum (lower highs) and price (higher highs), and as I often point out, momentum tends to win that fight.
For the time being, however, the trend is our friend … until it ends.
This brings me to the closer-up daily chart below, and the nearer-term opportunity at hand.
Given the near-term opportunity, I am using the help of the 8- and 21-day simple moving averages for guidance. Note that IBB has been coiling up below its horizontal resistance from March around the $368 area for the past couple of weeks, and in a very tight trading range. The low in late April is the pivotal medium-term reference level for the IBB ETF, and the bounce since then has put a great deal of pressure against the $368 area, which increasingly looks to give way to higher levels sooner rather than later.
Active investors and traders could thus buy the IBB ETF at $368 or higher for a move into the $385 area, while a bearish reversal of any real strength would quickly call off the near-term bullish call.
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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.
