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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.
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.
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.
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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