The scientific developments and integral nature of the biotech and healthcare sectors were on full display in 2020. This theme seems to be far from over as investors across the globe look to rebalance their portfolios and gain exposure to these important sectors. Based on the chart patterns discussed below, active traders will likely be focused on biotech companies for months to come due to lucrative risk/reward setups across the segment.
- The attention of many active traders has been turning to biotech due to the rollout of the COVID-19 vaccine.
- Biotech exchange traded products and their top holdings will likely be the focus of many traders over the weeks and months ahead.
The iShares Nasdaq Biotechnology ETF (IBB)
Active traders who are currently looking to gain exposure to the biotech sector are looking to exchange-traded products such as the iShares Nasdaq Biotechnology ETF (IBB). Fundamentally, the IBB portfolio consists of 284 holdings and has net assets of approximately $10.4 billion. In the chart below, you can see that the price of the fund recently broke beyond the resistance of an ascending triangle formation and is about to test the anticipated support near $144. Based on this pattern, we would expect stop-loss orders to be placed below $134.06 in case of a sudden shift in market sentiment or underlying fundamentals.
Illumina, Inc. (ILMN)
As one of the top holdings of the IBB ETF, Illumina, Inc. (ILMN) will likely be the focus of many traders. The pattern shown on the chart below will likely be of specific interest to followers of technical analysis because the break beyond the influential ascending trendline and psychological $350 level seems to have shifted the momentum in the favor of the bulls. The proximity of the longer-term support offered by the 50-day and 200-day moving averages and lower trendline will likely be used in determining the placement of stop-loss orders to protect against a sudden shift in fundamentals.
Moderna, Inc. (MRNA)
Much attention has been given to the makers of the COVID-19 vaccine. One such name is Moderna, Inc. (MRNA), which is one of the top holdings of the IBB ETF. In the chart below, you can see that regulatory approvals sparked a strong breakout beyond the resistance of a well-defined ascending triangle pattern.
Followers of technical analysis will likely want to note the recent retracement toward the support of the influential $100 mark. Bullish traders will likely look to place buy orders as close to the nearby resistance as possible and protect against selloffs by placing stop-loss orders below $109 or $73.63, depending on risk tolerance and outlook.
Companies in the biotech space tend to face significant barriers to success. One critical reason for this is that research and development costs for biotech names tend to be incredibly high. While a company is focusing its time and money in these areas, there's usually very little by way of revenue. It's not uncommon, therefore, for biotech companies to work together with larger, more established firms in order to achieve their research and development goals. Before these goals are met, a biotech company is incredibly fragile. Perhaps this is why the biotech space, while always growing with new names, has more and more come to be dominated by a small group of large companies in recent years.
The Bottom Line
There is no doubt that the healthcare and biotech sectors have proven their vital role in today's modern society. As investors look to rebalance their portfolios in 2021, these sectors will likely play an important role. Based on the patterns discussed above, it would not be surprising to see some extra funds shift into biotech.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.