The biotech sector is waking up after a long slumber and could move higher in coming weeks.
Biotech stocks are bouncing off deep lows after underperforming other market groups in the first quarter. While it’s likely the sector has entered a bear market, recovery waves within downtrends can be fast and furious, generating healthy profits for well-timed long positions. Just don’t stick around too long, or turn a trade into an investment by refusing a profitable exitwhen one’s offered.
Stick with funds and higher capitalized companies that show narrow support and resistance levels when picking biotech trade candidates. This will make it easier to identify low-riskentry points as well as the most advantageous exits. In between, keep stops tighter than usual because aggressive sellers could return at any time and end the nascent recovery effort.
iShares Nasdaq Biotechnology Index ETF (IBB) topped out near 400 in July 2015 and sold off to the long-term support in the first quarter. It bottomed out in February and entered a basing pattern that broke to the upside this week. The fund is setting its sights on major resistance at the 200-day EMA, currently declining from 305. The 50-day EMA has aligned tightly with the base breakout.
This pattern supports long-side entries on pullbacks to the 50-day EMA and breakout level, currently between 267 and 270. A high tight consolidation pattern will also work in finding a low-risk entry, using a 60-minute chart to buy pullbacks within that small-scale price action. The current bounce will run into short-term resistance just below 290.
Celgene Corp. (CELG) hit an all-time high at 141 in July 2015 and entered a downtrend that found support in the low 90s. Tests at that level in February and March have found willing buyers, contributing to this week’s three-month base breakout above a declining trendline at 103. The stock is already approaching resistance at 110 that should slow or stall the recovery effort.
A pullback to the trendline can be bought, with short-term profits taken at or near the 200-dayEMA. A more interesting opportunity may develop if the biotech bounce turns into something more enduring. The declining trendline off the July high is slowly converging with the 200-day EMA, making a breakout above that level a significant event, setting the stage for a larger scale rally that could reach the 120s. …read more
Read more here: Take Advantage of Biotech’s Bear Market Bounce (IBB, CELG)
Category: IBB, CELG, BXLT