A Building Case for Biotech

01/01/2016 7:00 am EST

Focus: ETFs

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Greg Harmon, of Dragonfly Capital, thinks the best way to participate in the biotech sector may be through ETFs—such as this one—since he feels technically analyzing prospects for an ETF is much easier than trying to figure out which companies will win and which will not.

Biotech has been a crazy hot and volatile sector of the stock market in 2015. It has made millionaires and it has cost people millions. The stories change with each stock and the results of each clinical trial. So without real deep fundamental knowledge, the best way to participate in this sector may be through ETFs. One of the most liquid ETFs in this space is the iShares Nasdaq Biotechnology ETF (IBB).

The chart for IBB is below. It had the strong pullback in August and then a second strong leg lower in September on Hillary Clinton’s comments on drug prices. But since that September bottom it has been building a series of higher lows. These have come against resistance at 342, where it sits going into the last day of the year. This creates an ascending triangle. A break above this triangle targets a move to 396, awfully close to the July high at 400.

chart
Click to Enlarge

The prospects for this ETF look good into 2016. It has bullish momentum with the RSI rising and in the bullish zone. The MACD is also rising and bullish. And the Bollinger Bands® are opening for a move higher. The lone dark spot is the flat 200-day SMA overhead at 348. A break of the triangle will signal strength in the biotech space and above 348 a confirmed move higher with a solid stop at the 342 triangle level. So much easier than trying to figure out which companies will win and which will not.

By Greg Harmon of Dragonfly Capital

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