The markets continue to head higher despite corrections among some recent high fliers like F5 Networks (Nasdaq:FFIV) and Motricity (Nasdaq:MOTR). While participation in this rally has narrowed a bit, there are still many sectors that appear healthy. Traders that have been able to make the adjustment and follow the money as it rotates have been rewarded with great trading opportunities. One group to keep an eye out for moving forward is the biotech sector. (For background reading, see the Ups And Downs Of Biotechnology.)
In Pictures: Top 7 Technical Analysis Tools
This group has some very good looking charts and 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 than with protecting existing capital.
ONYX Pharmaceuticals (Nasdaq:ONXX ) has been quietly stair stepping higher for several months and appears to be near the end of a consolidation. ONXX had cleared a base in November and after a tight consolidation rallied well into the $30s. It has since entered another consolidation between $34 and $38. It is currently pressing up against a trendline marking its most recent highs and could be close to attempting a breakout. Traders should monitor this test to see if ONXX is ready to resume its prior trend. (For more, see The Anatomy Of Trading Breakouts.)
Jazz Pharmaceuticals (Nasdaq:JAZZ) is another biotech that has been acting very well. JAZZ also cleared a consolidation back in November and more than doubled in price. It has refused to give up much of the rally as it consolidates and is trading in a very tight range just under $24 per share. Traders should keep a close eye on this level as a break above $24 would take JAZZ to all-time highs.
The chart for Spectrum Pharmaceuticals (Nasdaq:SPPI ) has a different look to it, but still possesses may similar qualities to that of JAZZ or ONXX. SPPI also rallied late in 2010 and has spent the early part of 2011 working off some of the buying pressure from the rally. These pauses in a stock allow money to rotate from prior holders to new ones and are an important part of a sustainable trend. SPPI recently cleared a narrow channel it was following as it pulled back from the $7 area and may have set an important low just under $6. This is the level traders should monitor as any break below this level would negate the current pattern.
AEterna Zentaris (Nasdaq:AEZS ) also recently cleared a narrow channel it was following as it pulled back from its recent highs. The $1.50 level held as support that lines up approximately with a prior high in September. Often prior resistance will become support and in this instance, it is now the important level to watch moving forward. AEZS should remain above this level on any weakness and could be on its way to attempt a breakout above $2. (For more, see Support And Resistance Reversals.)
The Bottom Line
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. 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 will not severely hamper their portfolios.
Many stocks in this group closed out 2010 on a high note and have been in the process of consolidating those gains. They may be ready after this recent consolidation to resume their rallies and should be watched closely. With the market continuing to show strength, it has become a trader's job to simply continue looking for where the money is rotating next. This group has had a nice pause and remains in a viable trading position.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.