The biotech sector, via the iShares Nasdaq Biotech ETF (IBB), tested a fresh 52-week low of $259.06 last week and is down more than 20% from the December peak just shy of $344.
The major moving averages are in a significant downtrend with no near-term signs of leveling out. The sector has come under fire following overinflated and higher drug prices along with the failing Affordable Care Act, or Obamacare. Healthcare stocks have also taken a shellacking and can be easily tracked by following the iShares Dow Jones U.S. Healthcare Providers ETF (IHF).
The IHF exchanged-traded fund has been in a mini trading range since bottoming at $110.32 in January. Short-term support is at $112.50 but a move below $110 could get the late August of $95 and change in play. Resistance is at $117.50 followed by $120-$121 and a downward sloping 50-day moving average.
While there is a good chance a rebound rally could lead to $120+, I will be watching IHF for a break below $112-$110 to possibly go short the index. However, options are thinly traded on IHF with wide bid/ask spreads. This will likely deter me from trying to trade options but it will help determine momentum in the sector.
Trading the biotech sector always carries risk but the rewards can be exciting if you can find momentum plays or companies with solid pipelines. One stock I want to bring to your attention is Inovio Pharmaceuticals (INO).
Shares surged 15% on Friday to close above the 50- and 100-day moving averages. Volume was enormous with nearly 9 million shares exchanging hands. The major moving averages are also leveling out with overhead resistance at $7-$7.25 and the 200-day moving average. A close above the latter could lead to a short-covering rally toward $8-$10.
I don’t like to chase stocks but bullish traders can use limit orders up to $7.25. I would look to exit the trade at $8-$10. Given the volatility, a stop can be set at $4.25 and below the recent 52-week low of $4.50.
The options for INO also look tempting to play as continued momentum and a possible run toward double-digits could materialize. The INO February 7 calls (INO160219C00007000) surged 200% on Friday on heavy volume. Bullish traders can try to get into these call options for $0.55 to $0.60 on this morning’s open if shares stay strong.
The INO February 7 call options expire in less than three weeks and make me a little nervous given the time period. These options could double or triple again from current levels if the stock makes a run to $8-$8.50 by Feb. 19.
The INO March 7 calls (INO160318C00007000) would give the trade another four weeks to play out with a breakeven price of $7.80 if the stock reaches this level. A double in the options would occur if INO trades to $8.60, technically, by mid-March.
The INO May 7 calls (INO160520C00007000) jumped 72% but were thinly traded. These options are worth a look for longer-term traders with a double occurring if INO shares trade past $9.15 by mid-May.
The company has nine clinical drugs in development, mostly in Phase 1, and it’s why the stock carries significant risk. However, with no vaccines or treatments for the Zika virus, shares have been on the move as the public becomes more aware of the threat.
The mosquito-borne disease has started to spread from Brazil and is now recognized in more than 20 countries. The Zika virus has been linked to a astonishing rise in pregnant women who give birth to babies born with unusually small heads.
Inovio Pharmaceuticals is working on a vaccine for the Zika virus that could be ready for emergency use later this year. The company’s lead developer said they were well ahead of the field in the race for a vaccine and timing is everything.
This news alone is not enough to warrant a major position in your portfolio but momentum and the longer-term outlook make this biotech name attractive. If Inovio is able to score on some of its other drugs in development, shares could easily reach low double-digits at some point during the next six to 12 months. The company also has strong partnerships with other big-pharma names it can exploit to help finance its clinical pipeline.
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