Has Biotech Turned the Corner?
04/22/2015 10:05 am EST
Since the daily analysis of the biotech industry group and several key stocks suggests that the worst of the selling may be over, MoneyShow’s Tom Aspray takes a technical look at the weekly and daily charts to help traders develop reasonable risk entry strategies.
The mixed close Tuesday further clouds the short-term market outlook as it suggests the correction from last week’s highs may not yet be over. A drop in the market tracking ETFs below last Friday’s lows will indicate a decline to more important support. The S&P futures are down in early trading and the heavy selling last week identifies that key support is in the 2064 area.
The Nasdaq 100 gapped higher Tuesday and formed a doji at only 1% below the breakout level at $109.20. The Nasdaq 100 A/D line has turned higher but has not yet broken through its downtrend, which is needed to signal the end of a correction (see chart).
One key component of the Nasdaq 100 appears close now to turning the corner. In March, my analysis suggested that the correction in the biotech stocks would last long and that the decline would reach stronger support.
I pointed out then that seasonally the iShares Nasdaq Biotechnology Index (IBB) typically bottoms around June 20. The daily analysis of the industry group as well as several of the key stocks suggests that the worst of the selling may be over. A look at the weekly and daily charts will allow one to develop a reasonable risk entry strategy.
Chart Analysis: The Biotechnology Index ARCA (BTK) has dropped back to its slightly rising 20-day EMA over the past three days.
- On a drop below the 4000 level, the daily starc- band is at 3939, which is 3.8% below Tuesday’s close
- The quarterly pivot and the longer-term support, line a, are in the 3894 area.
- There is even more important support in the 3750 area and the January highs (see arrow).
- The daily relative performance is trying to turn up from its WMA.
- The RS line appears to have held above the support at line b, but this week’s close will tell us more.
- The weekly RS line (not shown) did confirm the March highs and is still well above its WMA.
- There is short-term resistance now at 4131-4146 with the daily starc+ band at 4228.
- The monthly projected pivot resistance is at 4311.
First Trust NYSE Arca Biotechnology (FBT) has 30 holdings with the largest being Incyte Corp. (3.5%) and Vertex Pharmaceuticals (3.5%). There is 34.4% in the top ten holdings with an expense ratio of 0.60%.
- The daily chart of FBT shows a very tight range over the past week as the 20-day EMA at $120 has been tested.
- There is additional support at $118 (line c) with the quarterly pivot at $115.45.
- The daily RS line came down to long-term support, line d, in early April.
- The RS line has turned up from its WMA.
- The daily OBV moved back above its WMA on April 13.
- The OBV turned up sharply Tuesday as volume was 1½ times greater than the average.
- The weekly OBV (not shown) is trying to turn up after holding well above its WMA.
- Short-term resistance at $122.95 with the daily starc+ band at $125.45.
- There is monthly pivot resistance at $134.66.
Next Page: Another Biotech Stock to Watch|pagebreak|
Seattle Genetics (SGEN) is a $4.6 billion developer of monoclonal antibody-based therapies. They report earnings on April 30. The stock was down 19.4% in 2014 but is up 15.9% YTD.
- The weekly chart shows that the downtrend from the 2014 high at $55.99 (line a) was overcome at the end of February.
- The March high was $39.97 and the weekly starc+ band is at $42.91.
- The August 2014 swing high was $44.95.
- The quarterly pivot is at $35.12 with the seven week low at $34.21.
- The weekly RS line broke its downtrend, line b, on February 20.
- The relative performance is holding above its rising WMA.
- The weekly OBV is holding above its WMA but needs to move through resistance at line c, to complete its bottom formation.
The daily chart of Seattle Genetics (SGEN) shows that it is reaching the apex of its triangle formation, lines e and f.
- The rally from last week’s low at $35.93 looks constructive.
- There is further support at $35.60 with the daily starc- band at $34.53.
- The daily relative performance is trying to bottom as it is above its WMA but still below short-term resistance at line g.
- The RS analysis has longer-term support at line h.
- The daily OBV shows a pattern of higher lows, line j.
- A move through OBV resistance at line i, will turn the OBV positive.
- A move above the recent swing high at $38.52 will complete the flag formation.
What it Means: Though the intermediate outlook for the stock market is positive, the short-term trend needs another strong day like Monday to indicate that the correction is over. Apple, Inc. (AAPL)—one of the key technology stocks in the Nasdaq 100—also appears to have bottomed.
The biotechnology stocks need to rally a bit further in order to complete their corrective patterns. Until there is confirmation of a low, a drop back to or below the recent corrective lows cannot be ruled out. Traders should go 50% long initially with a fairly tight stop and add on a buy stop that will signal the correction is over.
How to Profit: For First Trust NYSE Arca Biotechnology (FBT) traders go 50% long at $120.51 or better with a stop at $114.47 (risk of approx 5.1%). Buy 50% long on a buy stop at $123.41 and raise any stops to $117.23.
For Seattle Genetics (SGEN) traders go 50% long at $36.76 or better with a stop at $34.83 (risk of approx 5.2%). Buy 50% on a buy stop at $38.61 and raise any stops to $35.46. Cancel any open orders before the close on April 30.