Trade of the Day: iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB)

The bulls got off to a strong start for April, which is historically the Dow's best month, rising an average of 1.9% since 1950

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Two sectors that have shown great strength are health care and biotech.  One of the health care instruments I track is the iShares Dow Jones US Health Care ETF (NYSEARCA:IHF).

In January, I noticed that the IHF had been in a mini trading range since bottoming at $110.32 in January, and that a move below $110 could get the late August of $95 and change in play. While there was a good chance a rebound rally could have led to $120+, I was watching IHF for a break below $112-$110 to possibly go short the index.

ihf

However, options are thinly traded on IHF with wide bid/ask spreads and I could not find an appropriate trade at the time, but this helped determine momentum in the biotech sector.

As you can see from the current chart, IHF broke down like a rented mule in early February following the breach of $110. The bears pushed a low just south of $106 shortly afterwards and the V -shape recovery since has been textbook.

ihf

As far as biotech, the sector has been hammered by negative news and price manipulation this year. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) stayed in a steady downtrend to start 2016 following a 52-week high just north of $400.

A trading range has formed since early February near the $240 level with a top at the $270 level, now in play. Friday’s second-straight close above the 50-day moving average appears to be a bullish signal, providing $275-$280 clears. A failure, or struggle, to clear $270 this week would keep me cautious on biotech.
IHF
As I mentioned, trading options on the IHF can be difficult due to low volume and wide bid/ask spreads. Trading biotech via IBB is a little more doable but the premiums are very pricey.

For instance, the IBB April 270 calls (IBB16041500270000), which last closed at $5.50, jumped more 70% on Friday with decent volume. These calls options opened at $2.77 and reached a peak of $5.80. There could be further upside in these call options if IBB continues to show strength but the aforementioned call options expire in 11 days.

It is very possible a 100% return could still be achieved from current levels but it would be a very high risk/ high reward trade. A quick look at the math reveals that if IBB shares clear $280 by the April 15 close, the IBB 270 calls would be $10 in-the-money. With IBB trading at $281, the options would be worth $11 for a triple-digit gain from an entry price of $5.50.

More realistically, using Limit Orders to buy the IBB April 270 calls at $5.75-$6 can be used on this morning’s open by aggressive traders and on a move above $270 in IBB. I would set an Exit Target at $8.00-9.00 once filled to target a quick profit of 25%-33%.

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For broader context, the technical outlook is also showing a possible rosy market April. The 50-day moving averages are all curling higher across the board in the major indexes. The bulls have cleared the 100/200-day moving averages that are flattening out and are showing signs of drifting lower. The lone exception is the small-caps which still have another 3% move to clear their 200-day moving average.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/trade-of-the-day-ishares-dow-jones-us-health-careetf-nysearca-ihf-ibb/.

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