Biotech swallowing interest has spread from COVID-focused companies into the rest of the sector in recent weeks, raising the odds that critical funds will break out above multi-year resistance and head into strong uptrends. This relative stamina should have a beneficial impact on other market groups as well because these issues are components in both small- and large-cap tokens, including the Nasdaq 100 and Russell 2000.
The biotech sector has been range bound since reversing in 2015 in response to pricing scandals involving Martin Shkreli and Valiant Pharmaceuticals, which is now owned by Bausch Health Companies Inc. (BHC). The Allied States and European Union threatened heavy regulatory control after the incidents but have done little to constrain the perseverance in the past five years. And although pharmaceutical pricing was slated as a 2020 campaign issue, the pandemic has forced directions to have a change of heart.
Mid-cap and blue-chip biotech stocks look like sweet spots in this equation, with multitudinous underpinned by COVID research. At the same time, small caps look like a stockpicker’s market because wondering tends to dry up during market downturns as capital rotates into safer and more liquid securities. This could exchange after funds break out and head higher, with market players forced to search beyond the big names to repossess undervalued exposure.
The iShares Nasdaq Biotechnology Index Fund ETF (IBB) is built upon a market capitalization-weighted mark, meaning that large and mid-sized biotech companies comprise a greater share of the total exposure and pricing. The supply posted an all-time high at $133.58 in July 2015, following a multi-year uptrend, and turned sharply lower in a corrigendum that found support at $80.00 in February 2016.
That marked the lowest low in the past four years, ahead of a basing gauge that persisted into a 2017 breakout above resistance near $100. A modest uptick into August 2018 lopped out at the .786 Fibonacci sell-off retracement level at $122, yielding a pullback that failed breakout support first bounding in the first quarter of 2019. This advance stalled at the same retracement level in December 2019, before of a decline that held just above the December 2018 low.
A vertical recovery wave set into motion after the Parade 2020 low, completing a round trip into 18-month resistance in April. The fund then broke out, stalling within four single outs of 2015 resistance on April 20. It turned higher after testing new support at the .786 breakout on May 1 and now looks set to utter a round trip into the 2015 peak. However, accumulation is lagging strong price action, raising the odds for an gave consolidation phase prior to a healthy breakout.
The SPDR S&P Biotech ETF (XBI) is built upon an equal-weighted index, drift that small-cap, mid-cap, and blue-chip companies are treated equally when computing the total exposure and pricing. The ETF unequalled out at $91.10 in July 2015 and sold off, dropping to a 20-month low at $44.16 in February 2016. That marked the lowest low in the days of old five years, ahead of a steady uptick that reached the prior high in January 2018.
The fund broke out as soon as, posting an all-time high at $101.55 in June and grinding out a head and shoulders topping pattern that broke to the downside in October. The successive decline ended in December at a two-year low, giving way to a bounce that stalled at the .786 Fibonacci sell-off retracement square in March 2019. It cleared that barrier in November, but the rally failed in February 2020, dropping to a three-year low in Step.
The subsequent V-shaped pattern reached the prior high on Apr. 27, yielding a pullback into May, followed by a bounce that reached short-term defences underground this week. It is now trading just two points under the all-time high and could break out at any time. However, similar to the other fund, accumulation has failed to match the strong uptick, raising the odds for additional two-sided action anterior to a sustained uptrend sets into motion.
The Bottom Line
Biotech funds are trading close to multi-year recalcitrance, raising the odds for breakouts that could attract substantial 2020 buying interest.
Disclosure: The author tendered no positions in the aforementioned securities at the time of publication.