Biotechnology stocks – as measured by one the industry's mainstay exchange-traded funds (ETFs), the SPDR S&P Biotech ETF (XBI) – have outperformed the S&P 500 by around 8% over the past three months. Interestingly, the group's bullish run that kicked off in early October roughly coincided with the sixth week in a row in which biotech funds saw withdrawals exceed inflows, according to research conducted by Piper Jaffray analyst Christopher Raymond, as reported by Barron's.

As the melt-up in biotechs has continued in recent weeks, outflows haven't slowed. "This is the 12th week of outflows in the past 14 weeks for the sector, during which time net outflows have totaled $3.5 billion," Raymond wrote in a client note in late November, per a follow-up Barron's story.

Despite money bleeding from this highly speculative sector, several positive developments in the fourth quarter provide plausible explanations for the recent run-up. Firstly, Massachusetts drug maker Biogen Inc. (BIIB) has surged 26% since the start of October on news that the company had decided to submit an experimental Alzheimer's disease medicine for regulatory approval. Meanwhile, a Food and Drug Administration (FDA) designation for a breakthrough prostate cancer therapy, along with rumors of a possible multi-billion-dollar acquisition of The Medicines Company (MDCO) by Swiss pharmaceutical giant Novartis AG (NVS), have also helped create industry buzz over the period.

Below, we take a more detailed look at XBI and two other biotechnology ETFs before turning to the charts to identify high-probability entry points.

SPDR S&P Biotech ETF (XBI)

With an asset pool of $3.74 billion, the SPDR S&P Biotech ETF has an objective to track the performance of the S&P Biotechnology Select Industry Index – an equal-weighted benchmark of U.S. biotechnology stocks. Leading names in the fund's basket of 116 holdings include Arrowhead Pharmaceuticals, Inc. (ARWR), The Medicines Company, and Seattle Genetics, Inc. (SGEN). A middling 0.35% expense ratio makes midterm holds workable, while daily turnover of nearly 5 million shares and an average two-cent spread allow traders to go after intraday moves. XBI offers a tiny 0.02% dividend yield and has added 16.53% over the past three months as of Dec. 3, 2019. It saw outflows of $37.5 million in November.

The ETF's share price traded within a textbook descending channel between April and October before breaking above the pattern's top trendline and the 200-day simple moving average (SMA) in early November. Given that the relative strength index (RSI) flashes an overbought reading, traders should look for a pullback opportunity. Think about placing a buy limit order around $83.50, where price finds a confluence of support from the upper channel line, 200-day SMA, and key 50% Fibonacci retracement level.

Chart depicting the share price of the SPDR S&P Biotech ETF (XBI)
StockCharts.com

Invesco Dynamic Biotechnology & Genome ETF (PBE)

The Invesco Dynamic Biotechnology & Genome ETF (PBE), which had a November outflow of $7.83 million, aims to provide similar investment results to the Dynamic Biotech & Genome Intellidex Index. As the name of the underlying index suggests, the fund invests in companies primarily involved in biotechnology and genetic engineering. Biogen takes a 6.71% allocation of the ETF's assets, while its top 10 holdings account for about half of the fund's value. Although not as liquid as some of the other biotech ETFs, PBE still has an average dollar volume of $600,000 and a competitive 0.19% spread. Longer holding periods are more expensive here, with an annual management fee of 0.57%. As of Dec. 3, 2019, the fund has net assets of $224.61 million and is trading almost 11% higher over the past three months.

PBE shares started their most recent leg higher in early October from the lower trendline of a descending channel. While the RSI has dipped back below overbought levels, Monday's steep drop may see more profit-taking in subsequent trading sessions. Those looking to buy the fund should consider entering near $52 – an area where price encounters solid support from the channel's top trendline, 200-day SMA, and closely watched 38.20% Fibonacci retracement level. For those wanting confirmation the uptrend has resumed, wait for a reversal, such as a hammer or bullish engulfing pattern, to form before executing a trade.

Chart depicting the share price of the Invesco Dynamic Biotechnology & Genome ETF (PBE)
StockCharts.com

Direxion Daily S&P Biotech Bull 3X Shares (LABU)

Launched in 2015, the Direxion Daily S&P Biotech Bull 3X Shares (LABU) attempts to return three times the daily performance of the S&P Biotechnology Select Industry Index, effectively making it a geared version of XBI. The $487.45 million fund's sizable exposure to biotechnology, medical research, and pharmaceuticals make it a suitable tactical tool for active traders who want a more aggressive bet in those areas. Some of the big pharma names in the fund's benchmark include AbbVie Inc. (ABBV), Celgene Corporation (CELG), and Amgen Inc. (AMGN). Like most leveraged products, the ETF's management fee isn't cheap due to the use of derivative instruments to achieve its magnified returns. More importantly, ample liquidity and narrow spreads work perfectly with the fund's short-term mission. As of Dec. 3, 2019, LABU yields 0.68% and has gained 48.25% over the past month. Outflows totaled $158.54 million in November.

Since setting a 2019 low at $27.01 in early October, the ETF's share price has nearly doubled. Like the two biotech funds discussed above, price broke out from a descending channel last month and now trades just 25% below its 52-week high set in the first quarter. Instead of chasing the market, look to buy dips around $42.50, where the bulls should keep prices well bid near the support of the 50% Fibonacci retracement level and a 12-month horizontal line.

Chart depicting the share price of the Direxion Daily S&P Biotech Bull 3X Shares (LABU)
StockCharts.com