by Serge Berger | April 11, 2014 9:27 am
So here we are, after a monster rise in biotech stocks since 2009 — for instance, roughly 360% gains in the Nasdaq Biotechnology ETF (IBB) — a more meaningful correction is finally upon us.
Click to Enlarge From a price and time perspective, the correction is now just about 20% deep and six weeks long, and IBB has reached its 200-day moving average (red line). But bigger-picture, biotech stocks are merely undergoing a very common occurrence called ‘mean reversion.”
Sadly, a new batch of investors and self-proclaimed traders that entered the market in recent years has never seen experienced the U.S. stock market (or even parts of it) undergo such strong mean-reversion moves. So, for these newbies that rode biotech stocks higher for years, this is becoming a first real test — one that only some will pass.
After not selling at the February top, many of those investors now find themselves with a conundrum where ego often trumps practicality and reason. As such, I hope to shed some light on the technical levels at which three of IBB’s largest biotech stocks currently find themselves:
Click to Enlarge Amgen (AMGN) over the years more or less rose in sync with other biotech stocks. And much like IBB, AMGN has so far merely retraced its way back to the 200-day moving average (red line), which roughly lines up with its late-2011 uptrend.
While this certainly is a logical area for AMGN stock to attempt a bounce from, it is too early to consider the stock out of the weeds, nor is it necessarily ready to push higher again.
The going here will likely be choppy for some time, and from a technical perspective, it would be surprising to see AMGN stock rise to new highs again anytime over the coming months.
Measure any bounce in AMGN, then see whether it is merely an oversold bounce, or indeed the beginning of a new wave higher. How does one measure this? A simple way would be to watch the $120 area, which was previous support for Amgen shares.
If AMGN once again runs out of steam around this area, it’s possible we could see another down-leg toward the $100 mark in coming weeks.
Click to Enlarge Since 2010, Biogen (BIIB) has displayed an ever-steepening slope. If the slope had gotten any steeper in February, it would have had to lean back.
As I often point out, steep charts that go vertical almost always are eventually subject to relatively sharper corrections as gravity takes over and a mean-reversion move kicks in.
So far in this correction, BIIB stock has dropped just about 20% off the top, but the rising 200-day MA looms large about 7% lower and likely will act as a magnet in coming days or weeks.
Click to Enlarge And then there is Gilead Sciences (GILD), arguably one of the biotech stocks with the biggest cult following by investors and traders alike.
Over the past couple weeks, GILD stock touched its 200-day moving average (red line) for the first time since late 2011. Yesterday, GILD stock snapped its 200-day MA and also fell out of a so-called bear flag pattern (black parallels), which could move Gilead shares toward the $60 area in the near future. That’s almost 10% lower from here.
Although GILD stock did take little breathers along the way, ultimately its slope got too steep. The trend-following crowd quickly got cold feet as GILD broke its trendline in early March.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
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