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Trade of the Day: iShares Nasdaq Biotechnology Index (ETF) (IBB)

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investors and traders alike experienced a little volatility jolt on Thursday as a number of stock sectors and groups such as technology, healthcare and transports reversed lower intraday. As a result, volatility bounced and some charts such as that of biotechnology stocks as represented by the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) left behind on the daily chart a so called “outside day” or “bearish reversal.”

Trade of the Day: iShares Nasdaq Biotechnology Index (ETF) (IBB)
Trade of the Day: iShares Nasdaq Biotechnology Index (ETF) (IBB)

While I remain positive on healthcare stocks as well as the IBB through the intermediate-term lens, from a near-term and trading perspective, Thursdays’ price action does make me sit up in my chair and take notice.

For some reference, when I last discussed biotechnology stocks and in particular the IBB etf in this column on June 2, I offered that the bullish reversal at the time coupled with a stronger healthcare sector chart points the IBB ETF toward a next upside target around the $300 mark.

This upside target was reached a couple weeks later, and by the second half of July, the IBB ETF even tickled the $330 area.

IBB ETF Charts


Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week 

On the multiyear weekly chart, note that after a five-year streak of outperformance the IBB ETF topped out in the summer of 2015 and after it was all set and done in early 2016 had corrected 40%.

A corrective move of this magnitude while not at all uncommon considering how sharply this biotech ETF rallied the previous few years, did however likely wash out many of the weak investor hands. Note that despite the sharp correction, the red 200-week simple moving average held as support all the while, as did the blue up-trending support line (blue dotted arrow).

By early June the 50-, 100- and 200-week moving averages all roughly coincided and gave a great deal of technical support to the IBB ETF, which then promptly bounced and broke above the $300 area horizontal technical resistance. That was and remains a constructive move worth respecting through the intermediate term.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, note that as the IBB ETF moved toward the $330 area in recent days it also reached the upper end of an intermediate term trading channel. On July 25 the IBB staged a first bearish engulfing day (the ETF rallied above the previous day’s highs but failed, reversed lower and closed below the previous day’s lows). That was a first warning sign and it was followed yesterday with a second such bearish outside reversal day.

From here, active traders could look to initiate short positions toward the $310-$305 area as a next downside target while active investors could take some profits up here and look to re-buy upon a next strong bullish reversal.

Equally, active traders looking to get short the IBB ETF here for a trade would be wise to get out of short positions upon any strong bullish reversal.

Check out Anthony Mirhaydari’s Daily Market Outlook for July 28.

Take Serge’s quiz to find out which trading strategy best suits your personality.

Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.

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