Just over one week ago, many retail investors were feeling like they missed the boat when it came to buying into biotech stocks. This week, however, the story has completely reversed. The sharp drop across the financial markets along with the accompanying spike in volatility now has most investors nervous about their investments and looking for direction on how to move forward strategically. Taking a step back and looking at the charts of key biotech-related exchange-trade funds (ETFs), the recent pullback could actually be presenting traders with a timely entry position with a lucrative risk/reward. (For further reading, see: The Ups and Downs of Biotechnology.)
One of the most popular products when it comes to gaining exposure to biotechnology is the iShares Nasdaq Biotechnology ETF. In case you aren't familiar, this fund comprises 197 stocks listed on the Nasdaq that primarily conduct business in the biotechnology and pharmaceutical sectors. Taking a look at the chart below, you can see that the recent sell-off has sent the price down toward the combined support of its 200-day moving average and an influential ascending trendline. These major areas of support have prevented the uptrend from reversing in the past, and active traders would expect this behavior to continue over the weeks and months ahead, which was affirmed by Tuesday's 2.03% move higher. From a risk management perspective, stop-loss orders will likely be placed below the nearby support in case the broad market sell-off continues to pull this niche sector lower. (For more, check out: Biotech Stocks Near Massive Breakout.)
Another popular ETF for gaining exposure to biotech is the SPDR S&P Biotech ETF. As you can see from the chart, the defined uptrend has dominated the momentum over the past 12 months, and the recent pullback is providing a risk/reward scenario that has not been available since early December. If traders were feeling like they missed the move higher in January, this is the ideal time to buy since the risk/reward is much more favorable. Active traders would expect the acending trendline, 50-day and 200-day moving averages to continue to act as strong levels of support, and most traders will use these as guides for determining the placement of their stop-loss orders. (For more on this topic, check out: Top 5 Biotech Stocks for 2018.)
Using leverage as part of a trading strategy is always a risky maneuver and is best practiced by those who truly understand the risk. For those more sophisticated traders out there looking to apply some leverage to the bounce in biotech, one interesting option could be the Direxion Daily S&P Biotech Bull 3x Shares. Taking a look at the chart below, you can see that the pattern looks nearly identical to that of XBI, which is unsurprising since it tracks the move in the S&P Biotech Shares. However, each move represents 300% of the daily performance of the S&P Biotechnology Select Industry Index. (For more, see: Leverage's 'Double-Edged Sword' Need Not Cut Deep.)
The Bottom Line
There has been no shortage of doom-and-gloom type stories over the past few days. With that said, the recent pullback in biotech and other related sectors is providing active traders with a timely opportunity to buy with a lucrative risk/reward scenario. With technical analysis, it is possible to identify other areas of strength like this and profit when others are unsure of how to move forward. (For more, see: Investing In Biotech: Is It Worth the Risk?)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the funds mentioned.