iShares NASDAQ Biotechnology Index (ETF) ( IBB ) - IBB fell 2.7% on Friday, as investors sold following earnings announcements by a host of heavily weighted companies like Amgen, Inc. ( AMGN ) and Gilead Sciences, Inc. ( GILD ). This resulted in some notable technical damage that now favors more downside in the near term. To mitigate volatility in individual names, IBB is my preferred trading vehicle.
While biotechnology stocks had a massive bull run and were one of the better trend-following stories in recent years, all good things must eventually come to an end… or least a meaningful pause.
After getting too far extended above its multiyear trendline in the summer of 2015, IBB dropped 40%. The decline mean-reverted the ETF back to its longer-term support line, but we can clearly see a series of lower highs since last summer.
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After rallying off the February lows, IBB hit a major area of technical resistance in the second half of April, which it promptly rejected last week.
On the daily chart below, we see resistance around the $290 area almost matches the 50% retracement of the drop from the previous lower high made in December down to the February lows. The downsloping 100-day simple moving average (blue line) also coincides with this area, creating an important confluence resistance zone.
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Last week, IBB left a bearish reversal candle behind, which now points to a retest of the February lows around $240. Traders could look to play IBB to the downside using put spreads or just shorting shares outright.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.