Biotech price action at all capitalization levels has deteriorated in recent weeks, with the two major sector funds giving up the majority of their 2018 gains. This downturn could be significant, marking the end of the intermediate uptrend that started in early 2016. However, that's just speculation at this point because those instruments will need to trade at even lower levels to confirm recent warning signals.
The iShares Nasdaq Biotechnology Index Fund (IBB) and the SPDR S&P Biotech ETF (XBI) carve different price patterns due to their unique holdings and construction. The market-cap weighted Nasdaq fund is dependent upon its biggest components, with Amgen Inc. (AMGN), Gilead Sciences, Inc. (GILD), Biogen Inc. (BGEN) and Celgene Corporation (CELG) comprising more than 32% of portfolio weighting. In contrast, the top 10 holdings in the equal-weighted S&P fund comprise less than 16% of the 125 total holdings, favoring smaller-cap rallies and declines.
Alarm bells sound when both sector funds sell off in lockstep because this bearish action often warns that macro forces are at work rather than industry developments. Biotech investors now face that scenario, driven by a broad fourth quarter retreat that may not have hit bottom yet. Fortunately, price charts on these instruments have drawn easily observed levels that should decide the group's fate in the coming months.
The SPDR S&P Biotech ETF cleared resistance at the 2008 high in the mid-$20s in 2012 and entered a strong uptrend that topped out at $91.10 in July 2015. It lost more than 50% of its value into the February 2016 low at $44.16 and turned higher, easing into a rising channel that reached the prior high in January 2018. A May breakout stalled at $100 in June, generating a triple top pattern that broke to the downside on Oct. 4.
The decline failed the three-year breakout and violated support at the 200-day EMA for the first time since October 2016. It also broke the rising channel in place since September 2016, setting off a wave of sell signals. The fund bounced near support at the April low last week and could now fill out a longer-term topping pattern that eventually yields much lower prices. The mid-$70s could mark a key inflection point if selling pressure continues, with the 200-week EMA defining the interface between bull and bear markets.
The iShares Nasdaq Biotechnology Index Fund cleared 2007 resistance near $30 in 2010 and entered a powerful advance that posted an all-time high at $133.58 in July 2015. It then sold off in a volatile decline, finding support near $80 in February 2016. The fund gyrated just above that level for the next 10 months, finally escaping gravity in November. Price action since that time has carved a rising channel that stalled at the .786 Fibonacci sell-off retracement level in August 2018.
The fund carved a small double top and broke down two weeks ago, testing the 200-day EMA for the first time since June, while accumulation has dropped to a seven-month low. Continued downside to $107 would bring channel support into play, with a breakdown signaling the end of the uptrend that started in 2016. Of course, the fund could bounce at that support level, but two factors raise the odds for a bearish outcome. First, the .786 harmonic retracement level has a nasty reputation as a rally killer, and second, the equal-weighted fund has already broken its rising channel.
The Bottom Line
Warning signals are ringing in the biotech sector, with aggressive selling pressure and failed breakouts raising the odds that the uptrend in place since 2016 is coming to an end.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>