Bullish on Biotech

Biotech is a hot sector right now and should quickly become a new focus for trend followers. My favorite way to track the trend in biotech is with the sector ETF: iShares NASDAQ Biotechnology Index (IBB). Through yesterday this fund is up 7%, outperforming the S&P 500 by 20%. For the trailing 12 months the fund has beat the S&P 500 by 24% with a return of 13%.

Let’s take a look at some charts. First, we will review the weekly price and volume action for one year:

I like to look at weekly charts when trying to identify long-term trends because they filter out alot of the noise we pick up with daily price action. Here are my observations on the above chart:

    • IBB is currently trading around 86 which is up almost 25% from the March low of 69.43.
    • The 52-week high for IBB is 89. This peak came along with the broad market making new highs last October.

 

  • After the March low, IBB began building a nice base to setup a rising trend that began in early July.

 

 

  • Notice the following key events in the price action at the beginning of July: 1.) The price broke out above both the 10-week and the 40-week moving average. 2.) The shorter term moving average (the 10-week) crossed over the longer-term moving average (the 40-week). 3.) The slope of the moving average turned up. 3.) The weekly prices have been positive on increasing volume.

 

The daily chart below confirms the bullish trend in IBB:

As the charts indicate, there is clearly a bull market in biotech. Trend followers may want to consider entering a position on a pullback in price. The price is extended well above the moving averages and a pullback is likely. However, it should be noted that biotech is a very volatile sector and any new positions taken in IBB should be done with caution. See the chart at the end of this post to get a clear picture of the volatility in this sector.

The key is to have a plan. Have clear rules that dictate when to get in and out of your positions. Don’t buy IBB based on this post alone. I’ve given you an investment idea to consdier, but ultimately you must do your homework and follow your purchase rules. Don’t have the time or desire to do your own research? That’s fine. My firm can do it for you. Contact us to see how we might be able to help you.


[DISCLOSURE: Some clients of Freedom Financial Solutions, LLC and/or Adam Zuercher’s family accounts own shares of IBB.]

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