As the sector-tracking iShares NASDAQ biotechnology ETF (IBB) takes out some major levels of resistance on Thursday, small and mid-cap biotech stocks are green nearly across the board.
The descending violet line in the chart above marks the top of the prevailing downtrend for this correction, which began with the IBB’s peak in February. The ascending yellow line tracks the higher and higher lows in the IBB over the last few weeks. These converging trendlines, in addition to the descending yellow line that marks the IBB’s lower highs over the last month, suggested in the last few weeks that a break in one direction or the other would be forthcoming. We wrote about this phenomenon in PropThink’s weekly recap just last week.
Thursday’s breakout is interesting because it clears a number of levels that traders identify as resistance as the IBB moves higher: the 50-day simple moving average (blue line), the major downtrend line in violet, and the top of the triangle (in yellow) that marks the ETF’s April/May highs.
The same phenomenon is apparent on a smoother weekly view of the IBB over the past year-and-a-half.
Rather than trying to time the bottom, we’ve taken the stance during this correction that investors should look for signals that the sector is climbing out of its rut – miss out on a few points of upside but avoid catching a falling knife by trying to time the bottom. Ultimately, the IBB breaking out of this resistance is bullish for the sector, but things could still turn around on Friday – a weekly close below the $234-235 area would put the IBB back within the bounds of the short-term windup. In addition, the day’s gains come on relatively light volume. It would be encouraging to see the breakout accompanied by above-average trading volume.
Finally, investors can’t ignore the bigger picture: the S&P 500 again approaching all-time highs as smart money talks ‘going market neutral’ and small-/mid-cap companies fail to participate in the broader peaks.
