Short the IBB ETF While Pressure Builds

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Biotechnology stocks as represented by the Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) took a hit last Friday as shares of Biogen Inc (NASDAQ:BIIB) tumbled on the back of a lower than expected outlook. The price action left behind on both the daily and weekly charts for IBB again smell of warning signs for large cap biotechnology stocks that a more meaningful corrective move could be in the making.

beatthebell_185x185When looking at an exchange-traded fund, it is always a good idea to be aware of its largest holdings. In the case of the IBB ETF, just five stocks make up almost 40% of the fund’s weight:

  • Celgene Corporation (NASDAQ:CELG)
  • Amgen, Inc. (NASDAQ:AMGN)
  • Gilead Sciences, Inc (NASDAQ:GILD)
  • Regeneron Pharmaceuticals Inc (NASDAQ:REGN)
  • Biogen

In other words, the price movement of these five biotechnology stocks will more than likely dictate a good part of the price movement in the IBB ETF. Three of these five companies are scheduled to report earnings this and next week, while two already reported.

The 22% price drop in BIIB stock last Friday was fast and furious and just goes to show what happens when momentum stocks disappoint on the growth outlook.

From a technical perspective, Friday’s move snapped the stock’s support line from early 2013 and confirmed the stock’s lower highs from June versus its absolute highs in March as important. This stock’s chart is now broken for the medium term, and while an oversold bounce is certainly possible, better support still comes in closer to the $280 area.

BIIB weekly stock chart
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IBB ETF Charts

The big down-move in BIIB also shook up the weekly chart of the IBB, which resulted in a bearish reversal candle that to a good part engulfed/erased the previous week’s parabolic rally. Also note that the highs from two weeks ago in the IBB ETF came on a lower high in momentum.

IBB weekly stock chart
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Moving on to the closer-up time frames of the daily chart, we see that the IBB ETF gapped lower at the open last Friday and closed the day near the lows (i.e., no bulls tried to save the day, and the bears remained fully in charge).

As a result, the ETF has now retraced about half of the July rally and mean-reverted back closer to the 50-day simple moving average. However, note that the $360 area now coincides with horizontal support as well as the 100-day SMA (blue line) and the $335 area is the next horizontal support below that, which matches up with the rising 200-day SMA (red line).

In other words, the next downside support zones are currently well defined.

IBB daily stock chart
Click to Enlarge

Active investors could look to initiate a partial short position in the IBB either using the ETF itself or selling out-of-the-money options credit spreads, using last Friday’s highs as a last stop-loss area and a next downside target near $360.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/pressure-builds-nasdaq-biotechnology-index-ibb-etf/.

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