Biotech Gearing Up for a Pullback?

There has been no shortage of encouraging news over the past few months across the biotech sector, but the patterns that are appearing on several key charts are suggesting that the story could be in the early stages of shifting. In the paragraphs below, we'll take a look at the patterns that some traders are talking about and try to determine if there is an indication that prices could be headed lower into 2019. (For related reading, see: The Industry Handbook: Biotechnology.)

SPDR S&P Biotech ETF (XBI)

Active traders who are looking for exposure to biotechnology often turn to exchange-traded products such as the SPDR S&P Biotech ETF. As you can see from the chart below, the price has been trading along a well-defined trendline over the past couple of years, but the recent close below the trendline suggests that the ETF is in the early stages of a downtrend. Followers of technical analysis generally use trendlines for gauging the direction of future momentum, and the recent breakdown suggests that the bears are in control and that the price could be headed lower for the next several months. Most traders will also look to the recent close below the long-term support of the 200-day moving average as confirmation of the move. Bullish traders will likely want to remain on the sidelines until the indicators start to reverse. (For further reading, see: Using DCF in Biotech Valuation.)

Tesaro, Inc. (TSRO)

Active traders who are looking to get a sense of where a broad sector such as biotech is headed generally turn to popular funds such as XBI. Taking a look at the fund's top holdings such as Tesaro, it is apparent that significant resistance could be standing in the way of a move higher, similar to what was shown on the chart of XBI above. The combined resistance of a long-term descending trendline and the 200-day moving average will likely be looked to as guides for determining the placement of sell and stop orders. Bullish traders will likely want to remain on the sidelines until the price rises above $49.79. (For further reading, see: A Biotech Sector Primer.)

Acadia Pharmaceuticals Inc. (ACAD)

Another top holding of the XBI ETF that traders will want to take note of is Acadia Pharmaceuticals. As you can see on the chart below, the recent rise has sent the price near the influential resistance levels of the 200-day moving average and a descending trendline. Technically, these levels suggest that the bulls have their work cut out for them if they are to continue to move the price higher. Most of the bulls will likely be looking to take profit near current levels and then re-enter should the price rise above the dotted trendline. (For more, see: Top 5 Biotech Stocks for 2018.)

The Bottom Line

Biotech has been one of the strongest performing sectors over the past couple of years, but recent moves toward key long-term levels of resistance are suggesting that the recent strength could be running out of steam and that the sector could be gearing up for a move lower. Long-term bullish traders will likely want to remain on the sidelines and wait for a clear signal that the bulls are in control of the trend. (For more, see: The Ups and Downs of Biotechnology.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.