Biotechnology stocks — as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — have rallied 13% year-to-date. That’s notable considering that over the past 12 months, the IBB ETF has “only” rallied by about 14%.
Many traders in recent days have pointed to the continued strength in biotech stocks as a sign that the broader market is not yet ready to roll over. But it is notable that the IBB, as a result of the recent rally, has now reached an important technical level on the charts that may offer better technical resistance.
A simple yet effective “trick” that I repeatedly use to gauge the internal strength of the broader stock market is by checking the pulse of the so called “risk-on” groups. While these groups change over the years, they often include technology and financial stocks. In recent years, biotech, tech as a whole and small-cap stocks, among others, have led the risk-on pack.
Over the past few weeks, biotech stocks and the IBB ETF have showed both absolute and relative strength versus the broader stock market. Through this lens, one could argue that it is premature to get too defensive on the stock market in the near-term and possibly the intermediate-term until biotech stocks begin to back off some.
When I last discussed the state of biotech stocks on Feb. 1, I offered that the IBB’s bullish reversal from Jan. 31 could be the beginning of a next swing higher with price targets in the $285-$290 area. Two weeks later, the upper end of this price target had been reached, and last week the IBB ETF further extended this rally into the $300 level.
Now, let’s look at the charts.
IBB ETF Charts
On the multiyear weekly chart, we see that this recent rally has brought the IBB back to the very upper end of a sideways channel, which now also lines up with the 100-week simple moving average (blue).
This confluence of technical resistance around the $300 area could provide a more meaningful challenge to be overcome.
On the daily chart, we see that last week, the IBB already marginally pushed above previous horizontal technical resistance from August and September 2016.
Moreover, we can see that over the past few trading days, the IBB ETF has been consolidating in a narrow range right at (or marginally above) those August and September 2016 highs.
At this juncture, biotech’s path of least resistance on the daily chart — despite the bigger technical resistance from the first chart above — continues to point higher.
Note also that the 50-, 100- and 200-day moving averages are also now beginning to curl higher again. Considering that price action is the ultimate arbiter, however, I believe the IBB (from a trading perspective) must now be able to clear above $302.50 for a next move toward $312 and possibly $315 to stand a better chance.
As usual, any bearish reversal would serve as a stop-loss signal on swing trading longs.
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