So much for a market pullback. The S&P 500 just erased all of Wednesday morning’s losses to finish in the green on the session. Bears’ inability to take equities down for more than a nanosecond is becoming a frustrating trend for dip buyers. There simply isn’t any weakness to pounce on. At least not on the surface. Fortunately, I dug deep and stumbled into a hat trick of perfect patterns in biotech stocks.
A little over a week ago, my preferred biotech sector tracking exchange-traded fund showed the industry up 24% for the year. And that was only five weeks into 2021. The blistering pace tells you all you need to know about the lovefest transpiring in the space. A textbook five-bar pullback has formed since then, officially giving us the first chance to buy the dip.
Forget the fact that the stingy S&P 500 didn’t give you a low-risk entry. Biotech stocks did. Here are my three favorite tickers to play right now:
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
- iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
- Boston Scientific (NYSE:BSX)
Let’s take a closer look at the price action. Then I’ll provide my usual set of trade ideas.
Biotech Stocks to Buy Now: S&P Biotech ETF (XBI)
One of the first things I remember learning about trading was, “don’t do drugs.” Many biotech companies, especially the small ones, suffer large gaps and volatile price moves. As a result, they’re tricky to trade and carry a higher risk profile. Fortunately, there’s a simple way to avoid most of the drama. Use an ETF. As such, I’ve included the Street’s two most popular biotech funds, starting with XBI.
XBI is an equal-weight fund that offers balanced exposure to a varied basket of mid-cap and small-cap companies. Its emphasis on smaller companies is a particular advantage right now given the outperformance we’re seeing by the Russell 2000 Index.
The chart of XBI offers a clean bull retracement pattern. Wednesday saw a bullish hammer candle form directly at the rising 20-day moving average. Given its proximity to support, the risk is low, and the potential reward is high. Implied volatility is on the lower end of its one-year range, making long calls or call spreads attractive.
The Trade: Buy the March $165/$170 bull call for $1.50.
iShares Nasdaq Biotech ETF (IBB)
IBB has followed the flight path of XBI, although its gains haven’t been quite as eye-popping. Compared to XBI’s 24% gain at last week’s peak, IBB was only up 15%. Still, the chart pattern is gorgeous, with a bull retracement also offering a low-risk entry at the rising 20-day moving average.
Wednesday’s hammer candle revealed buyers already swarming.
Implied volatility sits at the 13th percentile, signaling premiums are low and call spreads tempting. Consider using a break above Wednesday’s high ($167.73) as your trigger.
The Trade: Buy the April $170/$180 call vertical for $3.40.
Boston Scientific (BSX)
While ETFs are my preferred way to play the sector, there are a few biotech stocks that boast compelling setups of their own. Boston Scientific is my favorite of the bunch. Although its intermediate and long-term trends are choppy, the short-term momentum is turning higher. Aided by its quarterly earnings report, prices zipped to a fresh three-month high before forming the current retracement.
The key to this pattern is waiting for a trigger. Heading into Thursday, BSX stock has formed six straight sessions with lower daily highs and lows. Even though we’re sitting at a potential support zone, it’s important to wait for confirmation that buyers are returning. While both ETFs formed potential reversal candles yesterday, BSX did not.
If we break above $37.77, consider entering the following.
The Trade: Sell the March $37/$39 bull call for around 80 cents.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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