Biotechnology stocks — as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — rallied about 2.8% on Tuesday. As a result, the IBB ETF left behind on the daily chart what technical analysts refer to as a bullish outside reversal day.
The rally came on the back of a meeting with President Donald Trump and several large pharmaceutical CEOs at the White House on Tuesday. While more clarity is needed as to what the Trump administration’s exact agenda is for the pharmaceutical space — which includes the world of biotechnology — for the moment, Tuesday’s price action in these stocks must be respected.
Throughout the presidential campaign, the pharmaceutical sector was an area of focus by the candidates. Stocks within this sector saw plenty of gyrations as a result. While the broader stock market and many sectors pushed to new highs following the election results last November, pharma and biotech stocks largely speaking to this day remain range-bound and have shown relative weakness.
IBB ETF Charts
The best way to illustrate this is by the following ratio chart where I divided the IBB ETF by the S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Note the clear relative weakness that biotech stocks have shown versus the broader stock market.
While the fund showed some relative strength on Tuesday, the series of lower highs thus far remains well intact.
On the multiyear weekly chart, we see the choppy sideways range that biotechnology stocks have been in since early 2016.
From this angle — and through the lens of directional longer-term investors — this range should be respected. Because until it resolves in one direction or another, IBB’s price action is just pushing this group of stocks sideways.
The week isn’t yet over, and it’s difficult to see this on the multiyear chart, but last week and this week (so far), the IBB is marking the charts with long bullish candles. Intraweek selloffs so far are getting bought. This may be an initial bullish signal worth paying attention to.
The area around $265-$270 on the IBB is getting increasingly important as support.
On the daily chart, we see that the IBB etf has narrowed its trading range since last fall by making a series of higher lows and lower highs. Of note, however, is the breakaway gap to the upside from last November following the presidential election results.
While the IBB is still trotting sideways, the lower end of the post-election up-gap continues to hold as support.
Lastly, let’s note the bullish price action from yesterday, Jan. 31. The IBB ETF initially traded lower before quickly snapping higher and closing near the very highs of the day. The daily candle fully engulfed the previous 10 days’ worth of price action.
Active investors could try to play some follow-through buying in the fund. If and when this takes hold, it should be able to push the IBB ETF quickly back toward the $285-$290 area for now.
Any major bearish reversal, however, and erasing of Tuesday’s rally would be bearish and a sign to get out of bullish trades until the next bullish reversal rears its head.
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