Charts: Busted biotech to regenerate

Jeff Macke

It’s no secret that the biotech stocks have been screaming over the last year. Scientific advancements have driven the fundamentals and big pharma companies going on an acquisition spree have fueled a speculative frenzy. Combine the two and it’s led to a two-year double in the iShares Nasdaq Biotechnology ETF (IBB) with some specific biotech companies doing much better than that.

All of which was well and good until the shares started collapsing at the opening bell on Friday. With the stocks trying to recover in early trading Tuesday investors are wondering if this is yet another opportunity to buy the biotech dip or a good time to make a graceful exit.

In the attached video founder Brian Shannon says the uptrend is still intact. “We’re down about 13% off the highs we’ve seen this year and coming pretty close to breakeven year-to-day so it’s really not all that bad,” says the chartist. “We’re coming down to the 100-day moving average which is rising. That’s been an area where the biotechs have found support and bounced on 4 or 6 occasions in the last 6 months.”

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Using history as a guide, buyers should be coming in but Shannon wants to see it happen before putting his own money at risk. Right now the IBB is trading around $240. From $230 to $240 are key levels. If the rally is still in play the sector should start finding a bottom soon, but Shannon isn’t going to give it the benefit of the doubt.

His trade set-up is simple: if the Biotech ETF can hold support Shannon would like to start getting long with a stop around the $225 level. That gives him about $10 worth of risk. His upside for the near term is the old highs from $265 to $270. That gives a potential $35 of profits per share, assuming a $235 entry point.

As a pure chartist it’s all about the trend. $270 isn’t an upside cap. It’s resistance. If the uptrend is still intact then by definition that means higher highs and prices above $270. Deal with that later. “The most important part is the risk aspect and where do you cut your losses if you’re entering a new position right up here. That’s what we have to control is our risk.”

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