The majority of traders are laser-focused on the technology sector, so I decided to take a stroll around the Street to see what else was perking up. I didn’t have to travel far before I found the SPDR S&P Biotech (ETF) (NYSEARCA:XBI), which beckoned to my wandering eyes.
With a penchant for quality chart patterns and clean setups, the reason for XBI’s selection shouldn’t be surprising — it’s on the verge of breaking a huge multimonth base. That and its options are dirt cheap. It smells like a long call breakout play to me.
Let’s break it down.
Neophyte traders may not remember this, but once upon a time, biotech stocks were all the rage. Indeed, XBI and its close cousin, iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB), led the charge from the depths of 2009 through July 2015. XBI soared from a humble $14.35 to a stratospheric $91.11 — a towering gain of 535% in a little over six years.
Then, as it usually does, gravity set in and spoiled the fun. The biotech ETF suffered a 50% haircut and has been clawing its way back ever since.
It has gained back roughly 60% of its losses, in fact. This time, however, XBI’s trajectory isn’t near as vertical. And that, I suspect, is why its climb hasn’t been accompanied by near as much fanfare as in years past. There are simply more exciting sectors vying for eyeballs these days.
Nonetheless, the price action in XBI is becoming attractive here.
XBI ETF Charts
The accompanying weekly chart shows the fund’s parabolic ascent, 50% plunge and subsequent recovery.
In recent months, XBI has found heavy resistance in the $73 zone. This level is significant for a couple of reasons:
- First, it halted a prior advance in late-2015 making it a logical target for profit takers who may have scooped up shares at lower prices.
- Second, this level represents a 61.8% retracement of XBI’s entire decline. This Fibonacci retracement level is one of the most common areas for support and resistance to form.
- Finally, the 20-, 50- and 200-week moving averages are all pointing higher, providing little doubt that the trend supports buying bullish setups.