Biotechnology stocks as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) rallied about 1.9% on Monday on the back of merger and acquisition activity in the space. While the recent bounce in biotech land has largely taken place in sync, shares of Biogen Inc (NASDAQ:BIIB) through the lens of technical analysis and in my eye are showing a tight chart pattern and thus a great way to define risk for a breakout trade setup.
When I last discussed biotechnology stocks in this column on July 28 I offered that the IBB ETF looked overbought and that “active traders could look to initiate short positions toward the $310-$305 area as a next downside target while active investors could take some profits up here and look to re-buy upon a next strong bullish reversal.”
A little over one week later the IBB ETF had dropped another 5% and reached the $305 price target, thus completing my trade.
BIIB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Looking at the multiyear weekly chart of BIIB stock we see that after an initial sharp rally in July 2016 the stock settled in to a wide but well-defined sideways trading range that has since frustrated many a trader.
As I always say, one of the easiest ways to lose money in the financial markets is by trading choppy sideways market. I am happy to have stayed out of BIIB stock over the past year or so but now with the stock consolidating at the upper end of its trading range, it is increasingly looking ripe for a breakout of this range to the upside.
Also note that the MACD momentum oscillator is curling back up, reflecting that the stock’s moving averages are beginning to separate, which in turn is reflecting the stock’s rally over the past few months.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the closer-up daily chart we see the 13-month trading range in more detail. Here, note that from April through now BIIB stock has traced out a clearly visible inverse head-and-shoulders pattern as I marked with the series of black lines. This type of pattern is bullish in nature and thus could in my eye soon lead to a breakout rally through $300 and toward $320.
The most recent rally from the late-May lows began with a strong bullish reversal.
Bullish and bearish reversals are an integral part of profitably navigating the stock market and for those unfamiliar with these strong bullish reversals, I will be holding a special webinar Aug. 30 for InvestorPlace readers on how to find high probability trade setups using these powerful moves. Register HERE.
Active investors and traders could look to buy BIIB stock or bull call spreads with November expiration once the stock breaks and holds above the $298-$300 area. Any strong bearish reversal after that would lead to a stop loss signal while the $320 area is a first important upside target.
Check out Anthony Mirhaydari’s Daily Market Outlook for Aug. 29.
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