Why Biotech Stocks Face Steep Declines Ahead

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Biotech stocks continue to exhibit signs of weakness and are signaling that they are heading lower. After being up by 11 percent through the end of January, the group has deteriorated, and is presently up about 4 percent using the Nasdaq Biotech (IBB) as a proxy. But signs are emerging that the Biotech ETF may fall by 10 percent based on technical analysis, with some stocks potentially falling more than 20 percent.

Declines in individual stocks could be far worse based on the technicals. Alexion Pharmaceuticals Inc. (ALXN) could drop nearly 18 percent, while Alnylam Pharmaceuticals Inc. (ALNY) could fall by almost 21 percent. Jazz Pharmaceuticals plc (JAZZ) has the potential to drop by 10 percent, and Vertex Pharmaceuticals Inc. (VRTX) could see declines of almost 11 percent. Sharp declines in each stock could cause the biotech group to deteriorate further, as the charts are signaling might happen. 

Biotech ETF

To this point, the Nasdaq Biotech ETF has been unable to rise above an area of resistance at $111.50 on the past four attempts, as the chart below shows.

The longer the sector ETF is unable to break out, the more likely it is that the group will break down and retest the lows of around $101 seen in early February. That's a decline of nearly 10 percent. (See also: The Psychology Of Support And Resistance Zones.)



Alexion's chart suggests shares could fall all the way to $97 and retest the lows seen in June 2017. The chart exhibits the making of a descending triangle, which is typically a bearish pattern, and that would indicate that shares are likely to continue to fall. But first, the stock will have to test support at around $96.70. 



Alynlam's stock suggests that shares are also likely heading lower over the short to intermediate term. The chart shows mild support rest at $114, but that support level will likely not hold. The relative strength index (RSI) has been trending lower since November 2017, while still not hitting oversold conditions. This suggests that shares of Alnylam would need to fall through $114, perhaps to as low as $97, to finally push the RSI into oversold territory. 

For now, it seems the biotech group is trying to hang on and avoid another sell-off like the one in February. But in the absence of a positive catalyst, little is likely to prevent the sector from moving lower in the short term.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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