Biotechnology stocks as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) pushed marginally higher on Thursday, but more importantly, the sound technical backdrop not only in biotech but also in healthcare continues to favor the bulls for the time being.
Aside from not sticking to well-defined risk management rules (i.e. cutting trades and investments when they prove an investor wrong) the other two bad habits that keeps people from making money in the markets are: 1. Not having perspective on any stock, index, or other asset class through multiple time frames and 2. chasing steep charts and disrespecting the trend and major breakouts.
Case in point, the healthcare sector as represented by the Health Care SPDR (ETF) (NYSEARCA:XLV).
IBB Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the above multiyear weekly chart, I plotted the IBB ETF on the top part and on the lower part the XLV ETF. Note that the XLV ETF in June of this year staged a breakout above well-defined horizontal technical resistance. After some consolidation through the summer period, the healthcare sector over the past couple of weeks received a renewed bid and is pushing to fresh all-time highs.
In other words, the significant breakout from this past June was to be respected, as was the bigger picture longer and intermediate term up-trend.
Given that stocks are a highly correlated asset class, particularly within any given sector or group of stocks, it thus should be no great surprise to have seen the biotechnology stocks (part of healthcare) also making an important move earlier this summer. In June the IBB ETF br0ke out of a year and a half long consolidation period, all the while holding support of its red 200-week simple moving average.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see the breakout of the IBB more closely. Note that the consolidation period this summer following the initial breakout above the $300 area ultimately led to a “re-test” of said former technical resistance in August. By the second half of August, the IBB ETF had successfully re-tested the $300 area, which also coincided with its blue 100-day simple moving average and promptly began to rally.
Given that the IBB ETF since Aug. 21 has rallied about 11% in a straight line, in the immediate term it may be somewhat overbought. However, a break and hold above the $336 area could get another leg higher underway toward $350 and then possibly $360.
As always, any strong bearish reversals, especially if in conjunction with a broader market pullback, should be respected from a “swing trading” perspective. Remember, you can always “get back in.” In other words, opportunities are easier made up than losses.
Check out Anthony Mirhaydari’s Daily Market Outlook for Sept. 8.
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