Over the past few trading sessions, the broader U.S. stock market has begun to flounder somewhat. However, pharma and biotech stocks — the latter represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — showed some notable relative and absolute strength.
After having underperformed the broader stock market all year, the picture for IBB began to improve in mid-March, and now the biotech ETF looks like it wants to continue this ascent for a while.
Active traders and investors could look to tactically get long biotechnology stocks as a theme.
IBB Stock Charts
My daily ritual of market research starts with a perusal through so called ratio charts, or relative charts. Ratio charts allow us to get picture of relative strength or weakness of one asset versus another. Typically, when an asset shows both relative and absolute strength versus another asset, then the odds of at least somewhat further strength are high.
On the below chart, I plotted the IBB ETF versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and the relative strength of IBB is clearly visible.
If we take a look at the multiyear weekly picture of the IBB, we see that after too steep an ascent from 2013 into summer 2015, the price action since has been one big, steep mean-reversion move lower that measured 40% at the February lows. The IBB then reached its multi-year support line and a horizontal support area (blue box) that has seen lots of price history since 2014.
While it remains possible that ultimately the IBB will have to retrace at least marginally lower and break the 2012 support line, for now, this confluence area of support is holding. If taken within the context of the above ratio chart, that signals the idea that further upside from here is possible.
On the daily chart, we see that the IBB ETF since February has carved out a bottoming pattern with the marginally higher low in March quickly rejecting the February lows and bouncing higher. The IBB has since broken above its yellow 50-day simple moving average and now has a defined next upside at a confluence resistance zone made up of both the blue 100-day moving average as well as horizontal resistance.
Active investors and traders could look to nibble on the long side of the IBB using the $290 area as a multiweek/month upside target and respecting any strong bearish reversal.
Alternatively, in the options market, implied volatility on IBB options currently are in the 33rd percentile of the 52-week range, which in relative terms makes them less expensive. That could provide call or call spread buyers with an opportunity.
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