The once-splendid recovery in biotech stocks suffered a setback this week. Thanks (or curses) goes to Hillary Clinton’s presidential campaign for tweeting out a statement decrying Mylan NV (NASDAQ:MYL) for its price increases for EpiPens.
Fears of government intervention cutting into biotech companies’ profits fanned the flames of selling in the popular Biotech SPDR (NYSEARCA:XBI). XBI suffered a two-day 5% swoon on heavy volume.
So was that the death knell for the nascent uptrend in biotech land or simply a blip on the radar?
Given the technical posture of XBI I’d argue for the latter. Consider the following price chart.
For all its fury, this week’s selling sortie has failed to breach any significant support levels.
Quick side note: sometimes I like to play the game of “noise or noteworthy?” With so many crosscurrents, false starts, and otherwise frustrating back-and-forth, it’s comforting to have a process for spotting the signal amid the noise. I tend to view price movement that breaches key support or resistance levels as noteworthy. A breach of such thresholds has the potential to change trend structure and thus warrants a shift in my outlook.
Notice how the Wednesday-Thursday slip in XBI not only failed to take out the 50-day moving average, it wasn’t even able to close much below near-term support ($60.50ish).
It’s not coincidence that the rebound in XBI yesterday kicked off in the $59 zone. That level is littered with old resistance levels just waiting to become new support. And become support they did.
For now, this biotech stock dip is a buy. A break of the 50-day moving average would warrant re-assessment but until then, it’s game-on for biotech bulls.
The XBI Trade
Option sellers will be happy to hear implied volatility ramped to a new two-month high this week. And that means XBI options can be sold for more premium than in, well, two months.
I know, I know, it’s not a new 52-week high or anything but it sure beats what’s available every else.
If you’re willing to buy the biotech dip, consider selling the Oct $53/$48 bull put spread for around 67 cents. The trade is initiated by selling to open the Oct $53 put while buying to open the Oct $48 put. The initial 67-cent credit received represents the max reward and will be pocketed as long as XBI sits above $53 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $4.33.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
