A large number of biotech stocks have been clearing healthy bases recently. While each stock has an individual story related to a drug or product, their strong performance as a group shows that investors have been willing to put money to work in riskier asset classes. This is healthy behavior for an uptrending market, as investors are more concerned with maximizing their profit potential versus protecting existing capital.

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Biotech stocks have historically been one of the riskiest asset classes, but they can offer outstanding trading opportunities as long as traders use proper asset allocation techniques and pay attention to scheduled announcements and drug reviews. Often, the stocks will continue to move well after an announcement while theoretically having reduced exposure to risk.

Dendreon Corporation (Nasdaq:DNDN), for instance, had a very large move following positive news regarding its prostate cancer drug. DNDN had a huge gap back in April 2009 (not shown) and entered a lengthy consolidation. It cleared a base in September 2009 as it broke past the $25 level and began another consolidation. It recently emerged from the second base, with a break above $30 in February. DNDN is currently trading at all-time highs and patient investors have been handsomely rewarded. (For more, check out the Ups and Downs Of Biotechnology.)

Source: StockCharts.com

Incyte Corporation (Nasdaq:INCY) is another biotech stock that is clearing a base pattern. Notice how INCY cleared a level of resistance in early January and began consolidating above the prior base. It has been trading in a small triangle and holding above its rising 50-day moving average and prior base. It is just starting to emerge above the base and could be headed higher.

Source: StockCharts.com

Jazz Pharmaceuticals (Nasdaq:JAZZ) is another biotech stock clearing a base. JAZZ has been working on a large triangle for more than seven months. It has been steadily rising the past few months and was able to clear its base last week on a positive earnings report. The $11 area is an important level for JAZZ and would be a logical place to look for support on a pullback.

Source: StockCharts.com

Illumina Inc. (Nasdaq:ILMN) is a biotech stock that while not near recent highs, could be close to clearing an important level. ILMN has had a series of sharp moves over the past few months, beginning with a huge gap lower in October, which was followed up with a continuation move lower in November. This move trimmed the stock almost in half. However, it retraced the majority of the decline early in 2010 and has been forming the handle of a cup-and-handle formation for the past few weeks. The $41 level would be the breakout area for the base, but more resistance also looms just above near $45.

Source: StockCharts.com

Bottom Line
While many of these biotech stocks look attractive, it's important as a trader to compensate for the additional risk with this group with proper portfolio allocation, or possibly even using options to hedge your position. Traders should plan for a complete catastrophe and position themselves so that a blow up in the stock would not severely hamper their portfolios. Overall, this group has been looking good and with several stocks just emerging from bases, it's possible this strength will continue in the near future.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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