Biotech: When and Where to Sell

12/03/2014 10:20 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Biotechnology has been one of the best sectors this year, so MoneyShow's Tom Aspray uses seasonal and technical analysis for two biotech ETFs and two stocks completing monthly bottom formations to see if a correction could be an opportunity.

It was an impressive turnaround on Tuesday for the stock market as, after Monday's drop, the short-term momentum appeared to be turning negative. Of course, to keep the positive "Mo" going, we need to see further gains Wednesday. A drop back below Monday's lows will turn the focus back on the downside.

The S&P futures are flat in early trading and the EuroZone markets are flat to a bit higher. There is plenty of economic data for the market to digest today, including; the ADP Employment Report, PMI Services Index, and the ISM Non-Manufacturing Index.

The transportation stocks rebounded sharply as one of the railroads I focused on yesterday, Union Pacific (UNP) was up 3.8%. The small-caps were also up over 1% while the iShares Nasdaq Biotechnology (IBB) gained just over 2%.

This, of course, has been one of the best sectors in 2014, as IBB is up 35.4% YTD after a 65% gain in 2013. Many of the large biotech stocks like Amgen Inc. (AMGN) and Regeneron Pharmaceuticals are up over 50% in 2014.

Though the long-term trend shows no signs yet of changing the 10-20% correction, last spring took many longs out of the market. The sector's seasonal tendencies can be used along with price targets to determine levels where partial profits could be taken. Additionally, there are two under the radar biotech stocks that are just completing monthly bottom formations.

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Chart Analysis: iShares Nasdaq Biotechnology (IBB) has total assets of $6.5 billion with an expense ratio of 0.48%. The ETF has 117 holdings with 58.6% in the top ten holdings.

  • IBB reversed sharply from the October low of $247.86 as the quarterly projected pivot support at $250.60 was slightly violated.
  • IBB had a new daily closing high Tuesday with monthly projected pivot resistance at $320.11.
  • The weekly starc+ band is at $323.41.
  • The move through the resistance at line a, has upside targets in the $340-$350 area.
  • The seasonal tendency is for IBB to bottom on June 20 (line 1).
  • This ETF typically peaks out on January 9 (line 2) while a broader biotechnology sector tops in early February.
  • Last year IBB topped the week of February 28.
  • There is first good weekly support in the $285 area.

The SPDR S&P Biotech ETF (XBI) has total assets of $1.36 billion with an expense ratio of 0.35%. The ETF has 82 holdings with just over 18% in the top ten holdings.
  • XBI had a high last Friday at $184.16 as the daily starc+ band was tested.
  • The weekly starc+ band is at $193.12 with the monthly projected pivot resistance at $195.62.
  • The relative performance has been in a solid uptrend since July.
  • The RS line is now close to the February 2014 high but has not yet confirmed prices.
  • The weekly OBV moved back above its WMA one week after the October lows.
  • The OBV formed a clear negative divergence at the February highs (see arrow).
  • The OBV is above its WMA but is still well below the highs from early in the year, line e.
  • Monday's low was $174.26 with the 20-day EMA at $173.25.
  • There is more important support now in the $164 area.

NEXT PAGE: Two Just Bottoming Biotech Stocks

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Nektar Therapeutics (NKTR) is a $2.1 billion clinical stage biopharmaceutical company that is already up 46.78% YTD as it has been hugging its 20-month EMA, which is now at $11.43.

  • The November close was above the 2010 high of $16.06 as it was strong all last week.
  • The weekly close was above the starc+ band.
  • The monthly projected pivot resistance and starc+ band are in the $19.77-$19.90 area.
  • The resistance from 2004 and 2006 (line a), is in the $21.30 area.
  • The monthly relative performance closed at its highest level since 2012.
  • The monthly OBV closed in November above its WMA.
  • There is long-term OBV resistance at line d.
  • The monthly pivot is at $15.66 with the 20-day EMA at $14.98.
  • The monthly projected pivot support for December is at $14.05.

Celldex Therapeutics Inc. (CLDX) is a $1.8 billion biopharmaceutical company that focuses on immunotherapy technologies. CLDX is down 17.3% YTD as it is almost 40% below its 52-week high.

  • The weekly chart shows that CLDX moved through near term resistance, line f, two weeks ago.
  • This completes a short-term base formation that goes back to late 2013.
  • The downtrend from the 2013 highs, line e, and the starc+ band has been tested.
  • The monthly projected pivot resistance is at $22.51.
  • The 50% retracement resistance from the 2013 high is at $24.78.
  • The weekly RS line has moved well above its WMA and has just broken its downtrend, line g.
  • The weekly OBV moved above its WMA and resistance in October.
  • An AOT buy signal was then triggered at the start of November.
  • The monthly pivot and 20-day EMA are now at $18.20 with the daily starc- band at $17.19.

What it Means: The seasonal and technical analysis of these two biotech ETFs suggests it could top out early in 2015 and then see a meaningful correction. I would not expect it to be as sharp as the one we saw in the spring of 2014. I will be watching both the monthly/quarterly resistance levels as well as the starc+ bands.

These two biotech stocks just appear to be completing long-term bottoms, so a correction could be a major opportunity.

Celldex Therapeutics Inc. (CLDX) has already had a short-term pullback so traders could look to buy a bit lower.

How to Profit: For Celldex Therapeutics Inc. (CLDX) go 50% long at $18.36 and 50% long at $17.71 with a stop at $16.98 (risk of approx. 5.95).

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