Rally Hats Are On And We Are Watching Biotech Stocks For A Breakout
As Technical Research Analysts, we monitor indicators of internal stock market momentum, sentiment, and the like rather than studying individual company fundamentals. At The FRED Report, we have created some of our own indicators to evaluate such data (please see Advisor Perspectives articles on Stochastics). What are our indicators saying now about the current market? To give context to our opinion, in December we indicated the potential for a market correction into the end of the second quarter of 2022. We felt the market should make a tradable bottom, for at least a summer rally, at the end of June/early July. Now that we are at this point, a look at the indicators suggests there is indeed rally potential!
Healthcare is one of our favorite sectors to trade this summer, and our favorite speculative sub group is Biotech. There are several ETFs we can use to invest in Biotech. The main ones we watch are the SPDR S&P Biotech ETF (XBI) and iShares NASDAQ Biotechnology ETF (IBB). We show charts of these, below, and these charts suggest that IBB is more technically attractive. The reason for this is that XBI has formed a triple bottom with lows in 2018, 2020, and 2022. IBB has made higher lows during this time, as you can see from the chart, and as a good technician advocates buying relative strength, so that is our favorite to capitalize on strength in Biotech!
What kind of move could we see in IBB if this works? Here are a couple of price targets for IBB. Immediate resistance is the 130-area, and if this is exceeded IBB should test the 140-area, where it should pause- there is a lot of resistance there. That would be a decent return for the month, and most traders would be happy with this. As investors, a viable strategy would be to raise stops to breakeven if 140 is hit.
Our biggest concern here is that advisors move back into beaten down Tech names that lag the market on this rebound. Biotech is a much better speculative bet. We have told subscribers of The FRED Report to use a “time stop” if trying some of these names. What this means is that you set a time limit for a stock to work after purchase. If it is not performing at the end of that time, you are looking to sell the name. We will have more on these topics in a future article as this trade progresses.
