Biotech stocks declined 51.39% into the lows of February. Since then, the index followed through on its reversal, breaking the 11 month down trend in June of this year.
Summary
Fast forward to the 3rd quarter, where price action confirmed that Wall Street and Main Street alike, anticipated headwinds into the foreseeable future. XBI and IBB had been trending lower for six straight weeks, anticipating that a Clinton presidency would lead to more government regulation of the industry.
Instead, we are now faced with the exact opposite, as the President elect has indicated stifling regulations would be abandoned in favor of less stringent government oversight. It has become abundantly clear that the industry has a lot of potential going forward, as we witnessed phase one of the count down to higher prices, soon after the election results were tallied. XBI bolted higher.
We currently have higher lows and project that we will see higher highs sometime early in 2017, if not sooner, given the massive Kirby overhead once we clear 66.25. Above this level supply tapers quickly, suggesting a fast move to the upside, barring any unforeseen news or market driven events.
RSI is rising, with stochastic and MACD. Weekly volume is greater than at any time since the ETF started trading in 2006.
What Catalysts Will Propel the ETF Higher?
Less we forget, we should always look for catalysts, when considering a stock, ETF or index position. Invariably, the question we always hear from new traders is, will it go higher?
We cannot say with absolute certainty that XBI is destined to move higher next week, so we have to analyze the components to make an educated decision.
After all, if everyone is in a stock, there is no one left to buy, right?
That aside, we scanned the XBI components and found a half dozen of the Top 25 holdings which have not broken higher with the leading group. Additionally, we can assume XBI will back and fill on its way to a higher high sometime in 2017, so there should be plenty of buying opportunities along the way.
Here is a list of the Top 25 components for your consideration.
Intrexon Corporation (XON) is one such candidate, which met earnings last week, in its latest report on Wednesday 11/09/16. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components.
XON has been stuck in a range since April. This observation leads us to believe XBI components like XON could assist in pushing the index higher if more interest is seen in these laggards.
ACAD is another example. We traded this stock back in March after a Blog Post titled “Biotech, Pharma and Healthcare” which was accompanied by a watch list posted in the trading room.
Acadia traded from 19.00 (+/-) to 35.00 in the subsequent four weeks. After a short pullback, the stock found its legs and ultimately doubled from our original entry. Since then, the stock has moved in a range with lows at 30.50 (+/-).
We’ve drawn a line of support that aligns with 200ma resistance. Price was rejected on its first attempt to cleart this zone. Given the strength in this group, we’d assume ACAD will break above resistance in the near future. A better entry would be a pullback to the 9/20ema, followed by bullish volume. The stock is trading post-earnings.
ANIK was once a number one IBD rated stock. It has since slipped to number eleven in the group. Volume should be monitored, as this will signal institutions are at work. If prices breakout of this descending channel, we would more than likely move above the 200ma in the short term. This would light a candle under this stock and help propel it into the Kirby above Friday’s close. RSI and MACD suggest this is likely.
AMAG is number one in this IBD Industry Group. Oddly enough, it doesn’t rank in the Top 25 holdings of this ETF. Still, this candidate looks ready to move higher. Volume suggests institutions are buying in earnest. A “Pull Back to Break Out” or PBBO would be an ideal entry, otherwise look for a bullish flag and a pivot.
Additional stocks you might want to consider, follow this same train of thoughts. ARIA, ABBV and JUNO are noteworthy candidates for your shopping list, as we head into the unknown.
Finally, when you ponder the question, will XBI and IBB venture higher, you need to consider the catalysts. We believe the holdings inside this ETF hold the key to future gains.
As always, Happy Trading
Vinny
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