Is the SPDR S&P Biotech (ETF) (XBI) Done Running?

Holy biotech stock breakout, Batman! While the broader market dithers, biotech funds like the SPDR S&P Biotech (ETF) (NYSEARCA:XBI) and the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) are screaming higher. The XBI is up 10% over the past four trading sessions alone. Considering that the fund has traded in a 10% range for the previous four months, we’re talking about some serious acceleration here.

Beat the Bell: SPDR S&P Biotech (ETF) (XBI)

Heavy hitters in the space from Celgene Corporation (NASDAQ:CELG) to Amgen Inc (NASDAQ:AMGN) are leading the charge higher. But with XBI closing with a doji candle and now overbought, is it time for this red-hot industry to cool?

Perhaps. Let’s take a fresh top-down look at the space.

XBI Weekly Stock Chart

We can clearly see the four-month base-and-break pattern in XBI’s weekly chart. The current weekly candle is a thing of beauty. I just spotted a herd of bulls salivating over its strength.

XBI weekly chart
Click to Enlarge
Source: OptionsAnalytix

At this point, it’s essentially a Marubozu candlestick, which forms when a stock opens at the low of the session, rallies throughout, and closes at the high. The pole-vault has carried XBI right up to the next resistance level, which sits close at $80.50.

Breakouts that strike following an extended period of sideways churn are some of the best. With XBI having rested for months, it should have plenty of gas in the tank. While it’s certainly a bit overbought in the short run (which is easier to spot on the daily chart), the weekly trend looks robust. Any mild profit taking that arises as supply comes into the market should be considered a temporary setback, nothing more.

At this point, you should view any and all dips as buying opportunities.

Further buttressing the bullish argument is this week’s awakening of biotech’s relative strength. Compared to the S&P 500‘s summertime snooze, the XBI ETF is a veritable rocket ship. We could see the space eventually retest its all-time high of $91.11. It may take awhile, but make no mistake, that’s the long-term target.

Daily Chart

The hefty amount of participation is easily seen on the daily chart. In fact, we’ve seen a steady uptick in volume for each of the past four days. That’s no small feat. Institutions are piling into this pup with aggression.

XBI daily chart
Click to Enlarge
Source: OptionsAnalytix

But chasing at this point is ill-advised.

As mentioned, XBI is overbought, and Thursday’s trading session ended with a doji candle. Think of it as a stalemate. Sellers finally showed up and halted the bulls’ advance.


Watch for a close below Thursday’s low today to confirm the reversal candle. Best-case scenario (for bulls), XBI will consolidate through time to correct its overbought status. Worst case, the ETF drops amid heavy profit taking.

Either way, a dip toward $75 should be viewed as a gift.

XBI Trade Update

Part of the reason for today’s focus on biotech was a desire to follow-up on last week’s trade idea (see here). Apparently the market gods were smiling upon us, because we nailed the breakout with a long call idea. The Jul $70 call option that was suggested to be purchased for $3.25 now sits at $9.50. That’s almost a 300% return!

So what do you do now? You take it, ring the register. Don’t overstay your welcome. For all of the reasons mentioned above, XBI could be in for a pause at best or a pullback at worst. In either case, the long call will shed some of its value.

If you can’t bring yourself to part with XBI altogether, then at least make a trade adjustment to take some money off the table.

Sell the Jul $70 call for $9.50 and replace it with a long Aug $78 call for $4. This “rolling” adjustment will extend the trade out another month and extract $5.50 from the trade.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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