Biotechnology stocks — as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — lost about 6% last week. Over the past three weeks, they dropped more than 10%. As a result, the IBB ETF is resting on an ever-thinning line of support that bulls and bears alike need to examine.
When I made the rounds with investors last week, I continued to hear an overwhelmingly bullish tone on biotechnology stocks. Many of these pundits highlighted the “amazing long-term prospects” of biotechnology and used it as their main criteria/excuse for looking to stay long something like the IBB ETF … no matter what.
Over the years, I have found that the No. 1 reason why longer-term investors lose money is because they continue to use said “long-term” status as an excuse to stay in positions, even when they’re mentally against them. In other words, long-term investors who “believe” in the underlying story seem to kick risk management out of view.
Nearer-term traders and active investors, on the other hand, have a strong tendency to over-trade and ignore or forget the larger-picture support technical and resistance zones. In other words, they tend to get out of long or short positions way before any major support or resistance lines are reached. This can be just as devastating as riding long-term positions into the ground.
The lesson: Always look at multiple time frames, as we’re about to do with the IBB ETF.
IBB ETF Charts
Looking at biotech stocks through the lens of the IBB, we see that from a multiyear angle, the following three simple moving averages have been a good area of reference: 50-week (yellow), 100-week (blue) and 200-week (red).
Note how since the IBB topped out in summer 2015, it systematically first broke below the 50-week, then below the 100-week, and now is flirting with a break below the 200-week moving average. The ETF has been consolidating on top of this longer-term moving average all year. The longer it pushes its weight on this moving average, the better the odds that it ultimately breaks below.
On the daily chart, we see that the IBB attempted a marginal breakout in the July-September period. However, the selling spree of the past three weeks has since pushed it right back into the middle of the year-to-date trading range (blue box). While the ETF may be somewhat oversold in the near-term, as long as it remains within this range, it is best sold on rallies and bought on dips.
If and when the IBB breaks below the $250 area on a weekly closing basis, it would constitute a decisive break below the aforementioned 200-week moving average. For longer-term biotech believers, this could be yet another level to take further profits or reduce longer-term positions.
For quicker players, a break below $250 would be a further sign to sell/short rallies. Should the 200-week MA break as support, then a move into the $200-$225 area can’t be ruled out.
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