Biotechnology stocks — as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) — while participating in the “Trump rally” have largely paused for the past nine trading sessions.
For the year-to-date, this group of stocks remains stuck in a well-defined trading range, but it’s worth exploring what would constitute to a buy signal and breakout of the range that traders and active investors could sink their teeth into.
Before looking at the popular IBB exchange-traded fund charts, allow me to remind ye faithful that the U.S. stock market is currently undergoing an orderly sector and group rotation. Financials, transportation stocks and industrials were some of the first stocks to pop in the early innings of the Trump rally, but this has since expanded into other areas of the market, such as consumer discretionary and energy stocks.
As such, when a subscriber of my Clubhouse Membership asked me yesterday what I think of biotechnology stocks at this juncture, I pointed out the potential of money flowing into these stocks as a function of sector and industry rotation.
Looking at the multi-year weekly chart of the IBB ETF, we see that, after a much-too-steep rally into the middle of 2015, a sharp selloff occurred. By this past February, IBB had dropped about 40%, which through a long-term lens, may still be looked at as a mean-reversion move lower. Ever since then, the IBB ETF has found support and danced on the red 200-week simple moving average and below the purple horizontal resistance line.
Click to Enlarge In other words, biotech stocks are stuck in a range that, while playable for the active investor and trader, has been nothing short of frustrating for the buy and hold investors and trend followers in the crowd.
When I last mused about the state of the IBB ETF on Oct. 17, the ETF was trading right in the middle of this year-to-date trading range. It then proceeded to work toward the lower end of the range, around the $240 to $250 area.
At the time, I suggested that unless we see a decisive break below this support area, and the trading range remains in place, the lower end of the range should be bought again. Sure enough, support held and the IBB ETF has since worked its way back to the upper end of the range.
Over the past nine trading days, the IBB etf has consolidated in what could be considered a bull flag pattern. This is nice to see, but it’s way too premature to take any bullish posture on until a break above the $290 area on a daily closing basis takes hold.
If and when this takes place (which should come as a result of the aforementioned group rotation game), then the IBB could also be in better shape to potentially break out of the year-to-date trading range toward $320.
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