Almost everyone that follows market will know that the bio-tech sector has been one of (if not the best) best performing sectors the past few years. If you do not believe me, just take a quick glance at the monthly chart below of $IBB.
If you cannot see it, just click on it for a larger view. It is up 200% since the HIGH of 2010. That is a lot and there is no reason for this (monthly) trend to ever slow down. However, I am not a trader on the monthly timeframe, I trade the daily charts, which leads me to the point of this article.
Based of the simple technical analysis I incorporate into my trades, it looks as if $IBB & $XBI (both biotech etfs) are topping out. You may be asking ‘why?’ Perfectly valid question.
A few different reasons.
1. The churning of price at these current levels. By this, I am referring for the tendency for price to have large ranges and alternate green and red days frequently. This can be seen on the $IBB $XBI which is lower in the post.
2. The relative weakness of the sector as a whole, evident through the ETFs. Relative weakness of a stock is exactly how it sounds, it is the performance RELATIVE to another entity, this case, the indices ($SPY, $IWM, $QQQ $DIA). There is not a special formula or ratio to determine relative weakness, though some indicators try. All that is important to me and my analysis if the stock (or ETF) is red on the day and the market is green, then this stock is showing relative weakness. Simple as that.
3. The price contraction of the sector as a whole, as evident through the BB squeeze in the individual stocks as well as the sector ETFS.
Ok, these three things are the three things I gleaned from my analysis of the biotech sector. The purpose of providing you with this information is to show you a glimpse of what my process looks like.
Now, you likely want to see some of these charts in action, right?
The first chart below is of the $IBB (sector ETF). If you are having trouble interpreting the price action, re-read the three things listed above and see if you can pick them out on the chart – this is always a good exercise when you are learning technical analysis.
The next chart, below, is a chart of the $XBI (another ETF). As clearly seen when comparing the $IBB to $XBI, $XBI is the obvious (relatively) weaker ETF. Other than determining that, there is not much more data that we can gather through this chart. We don’t know if $XBI is the leader and if $IBB is destined to follow – or not. Time will tell.
Ok, great. We have gone over the important concepts and analyzed of sector ETFs, now it is time to dig into some stocks. Below you will find a handful of individual stocks from the biotech sector. Following this I will cover the connotations of price in each case.
(in the order above)
$GILD – Flat 21 ema, meaning the trend if well, trendless. Showing relative weakness? Yes. Price contraction? You betcha, take a a look at those BBs being pinched.
$CELG – A little stronger (relatively) to it’s peers? Sure. Still relatively weak compared to the indices? Yup. Price contraction? Yup.
$AMGN – Last, but still showing the same patterns as the rest. Relative weakness? Yes, even stronger weakness relative to it’s peers. Price contraction? Sorta.
Ok, awesome. We covered some individual stocks now. The last question I need to ask my self is ‘Should action be taken?’
In this case, yes. Take a look at the chart of $BDSI, seen below.
This chart is the one chart that has all the components we spoke about at the beginning of this post. It has relative weakness to both the indices and it’s peers. It definitely has price action, the best out of all of them (as evidenced through the BBs). It is without a doubt ‘choppy’ and ‘churny’, just take a look at the past couple weeks candles. Finally, the most important thing of all, risk can be clearly defined. Above 17.80ish, we are out of this (short) trade. The reason for this stop is that price gets to this level, the stock is more likely to break higher than lower.
So, there you have it. A look inside my head and why we are shorting $BDSI here. If you have any questions or comments, feel free to short me an email here: http://www.bencbanks.com/contact/