Gilead Sciences, Inc. (NASDAQ:GILD) rallied 2.7% on Monday as the broader biotech complex lifted as well — potentially on the back of a relief rally in troubled Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
The broader biotechnology complex as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) remains in a well-defined downtrend and roughly 35% off the 2015 highs. However, the price action in recent days may offer active investors and traders a chance at a bounce in GILD stock — courtesy of a squeeze in overly bearish investors.
Before looking at the positives that support a bounce in biotech stocks such as Gilead, let us keep in mind that the broader U.S. and European stock markets remain in bear market territory supported by little fundamental earnings growth and facing economic headwinds. Corporate buybacks of historic proportions and central bank interventions continue to push stocks off oversold conditions, and this over the past couple of years has led to several historically unprecedented V-shaped price recoveries.
Ultimately, economic gravity tends to win these games, which is why I remain cautious of getting overly bullish on stocks for anything longer than a few weeks at a time.
Looking at the most recent V-shaped bounce off the February lows, the more a rally extends and the steeper its slope, the more difficult it gets for active investors and traders to participate. But if you looked under the surface in recent weeks, you’d have noticed a constant rotation of stocks where one sector or industry after another received a bid and broke past near-term technical barriers to the upside.
To wit, biotech stocks have shown at least marginal relative strength now for a couple of trading days.
It might be trying to signal something.
GILD Stock Charts
Looking at the multiyear weekly chart of Gilead Sciences, we see that GILD stock began forming a topping pattern in 2014, which in January of this year finally broke to the downside as the stock sliced through its blue 100 week moving average. Gilead then got overextended on the downside in February along with the broader market and the recent bounce may act as a re-test of former support (blue band of resistance), which could now become resistance.
The band stretches roughly from the low $94s up to the high $97s, which could be a first price target range for traders trying to play a bounce.
On the daily chart, we see that with its 2.66% rally on Monday, GILD stock cleanly broke out of a wedging consolidation pattern and may now be steering toward a confluence zone made up of its blue 100-day moving average and the downtrend line from last summer, as marked by the red dotted diagonal.
This confluence zone also matches up with the aforementioned blue box of resistance on the weekly chart.
Active investors and traders could now look to play Gilead stock toward the $96 area using any sharp bearish reversal of Monday’s gains as a stop-loss trigger.
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