Biotechnology stocks as represented by the popular iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) continue to exhibit a very heavy picture, and a next leg lower looks to be near.
Stocks and ETFs tend to stay in motion with the same direction (and speed) unless acted upon by an unbalanced force. Thus active investors and traders can still look to play the IBB ETF to the short side until and unless this picture changes notably.
Newton’s first law of motion that I paraphrased above doesn’t get enough respect from investors and traders. “Trend following” is arguably the most successful and time-tested trading strategy of all time. Trend followers believe “the trend is their friend — until it ends.” The current state of the IBB’s price action, as we will see on the below charts, shows an intermediate-term downtrend that’s still intact.
A fairly significant opposite force — such as a hefty news item — will be needed to stop this downtrend in the IBB ETF in its tracks.
IBB ETF Charts
On the multiyear weekly chart of IBB, we can draw a couple of straightforward lines to gain some perspective.
First and foremost, note that the 2011 uptrend line remains intact (though maybe not for long), and that the sharp 40% correction in the IBB ETF off the 2015 highs has thus far only been a mean-reversion move back to this line.
Second, we can draw a simple horizontal band (blue box), which until 2014 acted as resistance, and after IBB broke back below it this year, it might now again be resistance.
We also see a well-defined series of lower highs since the 2015 top that are now visibly putting more pressure on the 2011 diagonal support line. While a break of this line does not have to result in a cataclysmic free fall in the IBB ETF, it would be a trend continuation move that active investors could profit from.
On the daily chart we see this intermediate-term downtrend since the 2015 highs more clearly. Specifically. we note that the rebound off the February lows in April found resistance at the blue line, which is a former area of technical support. The failure at this horizontal resistance area around the $290 mark has since pushed the IBB ETF back to the diagonal support line from the January lows and is also pushing much weight on this line.
Note also that the early June highs recorded a marginally lower high versus the April highs.
From here, active investors and traders could look to either leg into initial short positions using the IBB itself, buying puts or put spreads or even selling out-of-the-money call spreads using August options.
A first downside target is the $240 area (the February lows), followed by possibly a second target closer to $220.
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