During the market volatility of the past two weeks, some of the highest-flyer stocks and groups of stocks were hit the hardest, among them biotech stocks. From Thursday, Aug. 20 until Friday, Aug. 28, the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) saw a major round trip whereby it dropped more than 20% and rallied back more than 20% … all in a matter of days.
However, the volatility and downward pressure on price did break the IBB ETF below some key trendlines and support areas, which makes another leg lower in coming weeks/months likely.
On July 27, I said in this column that the IBB ETF looked to have completed its overshooting rally and that considering some notable weakness from stocks in the biotech ETF — such as Biogen Inc (NASDAQ:BIIB) — a deeper mean-reversion move to the downside looked likely in the near to medium term. At the time, I said that selling out of the money call spreads would be a good risk/reward strategy — one that has since rewarded investors handsomely.
IBB ETF Charts
Looking at the multiyear picture of the IBB ETF, we can now circle some key technical areas of interest for active investors to build trades around.
First, note that the exhaustion buying and ensuing weekly bearish reversal in mid-July, which I pointed out in the July 27 trade idea, did indeed mark a top in the ETF. With waning upside momentum (lower highs) and a broader market that had little to support itself on, it was just a matter of time until biotech stocks, which had been so strong for years, would finally mean-revert lower.
After the first week of broader market volatility in mid-August, the IBB ETF snapped its 20 week simple moving average (blue line) and did so even further the following week. The magnitude of the break of this formerly trusty moving average, which also coincided with some simple lines of support, speaks volumes.
In other words, all else being equal, these former support lines should now act as resistance for some time.
Also note that measured from the April 2014 reaction lows to the August top, the IBB ETF last week retraced 61.8%, which is an important Fibionacci support area. A bounce there made sense and may even hold the ETF as support through the medium-term lens, but overhead resistance is strong and a marginal re-test of last week’s lows in the high $200s or even drop below there looks to be the path of least resistance.
On the next chart, we see that the aforementioned resistance areas also bear significance on the daily chart. The area between the 100- and 200-day moving averages (blue and red lines respectively) also coincide with the broken uptrend line and horizontal resistance.
Aggressive traders could look to sell short the IBB ETF itself in small size to accommodate for the increased volatility while a more conservative approach would be to again sell out of the money call spreads with at least two months left until expiration.
Like what you see? Sign up for our daily Beat the Bell e-letter and get investment advice delivered to your inbox every morning!
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.
