The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) rallied sharply over the past couple of weeks after having reached my near-term downside target in late June. While the intermediate term lower trend remains intact for the IBB exchange-traded fund, the upcoming earnings season for large biotech companies could be a make-or-break one for this ETF.
When I last offered a trade idea on the biotech space — and in specific, on the IBB ETF on June 23 — I mused that the February lows look to be in immediate risk of being retested. Three days later, this first downside target was reached and near-term oversold readings flashed.
In the coming weeks, all of the top holdings of the IBB ETF are scheduled to report earnings, which is to say that for the near to intermediate term this could be a make-or-break period for this space in terms of price action.
As we will see on the ensuing two charts, the IBB is holding on to crucial technical support by a thread and is just one stumble away from another meaningful leg lower.
IBB ETF Charts
On the multiyear weekly chart, we note that after a strong multiyear run, the IBB topped out in the summer of 2015 and after a 40% drop over the ensuing seven months, once again began to bounce in February of this year. The area where the IBB ETF began to bounce and still remains around is a crucial confluence support are made up of the black 2012 trend support line as well as the red 200-week simple moving average.
Note that the yellow 50-week simple moving average has been notably turning lower for months as a result of the strong intermediate-term down-trend. The longer the IBB remains hovering on this technical support area around $240 in the bigger sense, the better the odds ultimately become of another leg lower.
On the daily chart, we see that after the last thrust lower in late June, the IBB ETF saw a sharp bounce along with the broader stock market. Unlike the S&P 500, however, this biotechnology ETF simply bumped to another lower high that on Wednesday was rejected by the purple down-trend resistance line from the July 2015 highs.
From here and from where I sit, the direction of the next 10% – 20% move in the IBB ETF is all about how these biotechnology stocks want to react to their upcoming earnings reports.
Aggressive traders and active investors could consider buying some cheap puts or put spreads on the IBB ETF. More risk-averse traders could wait to see how biotech stocks react to upcoming earnings and then either lean short upon further weakness or switch long upon a break above the $290 area on at least a daily closing basis.
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