3 Biotech Stocks to Buy As Things Heat Up for the Sector

biotech stocks - 3 Biotech Stocks to Buy As Things Heat Up for the Sector

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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:

  • 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)

S&P Biotech ETF (XBI) stock chart with bull retracement

Source: The thinkorswim® platform from TD Ameritrade

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)

Nasdaq Biotechnology ETF (IBB) stock with bull retracement

Source: The thinkorswim® platform from TD Ameritrade

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.

The composition of IBB more heavily favors large caps, with Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD) and Moderna (NASDAQ:MRNA) comprising nearly 20% of the fund.

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)

Boston Scientific (BSX) stock chart with bull retracement

Source: The thinkorswim® platform from TD Ameritrade

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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