Biotech stocks have faded following their post-election bump. Since peaking at $ 68.16 after Donald Trump’s historic win, the exchange-traded fund SPDR S&P Biotech (ETF) (NYSEARCA:XBI) has retreated 10%, giving back half of its election-driven gains. Traders wondering about the biotech sector’s next destination would do well in heeding the price pattern that has cropped up in XBI.
The backing and filling striking XBI has taken on the form of a falling channel, complete with lower highs and lower lows. Though uninspiring, the action has created a few key price levels to trade off of over the coming weeks.
Take the falling trend line that defines the upper end of the channel. Thus far it has proven impenetrable despite multiple breakout attempts. Until this ceiling is shattered, consider bullish XBI plays a fool’s errand.
Some chartists look to moving averages to provide clues for a stock’s next direction. Unfortunately, the meandering nature of XBI in recent months is delivering mixed messages among these smoothing mechanisms. The 200-day (green line) is rising slightly, confirming the long-term trend has turned higher for biotechs. But the flat 50-day (blue line) and soon to be flat (or falling) 20-day (red line) isn’t lending much help in forecasting biotech’s next move.
Instead, wait for resolution out of the channel to confirm whether bulls or bears have gained the upper hand. And if the volatility in XBI doesn’t do it for you, remember you can always play the high-octane triple leveraged funds, Direxion Daily S&P Biotech Bear 3X Shares (NYSEARCA:LABD) and Direxion Daily S&P Biotech Bull 3X Shares (NYSEARCA:LABU), to get your volatility fix. LABD typically moves three times more than the daily move of XBI in the opposite direction while LABU moves three times more in the same direction.
Pick Your XBI Biotech Poison
If you’re anticipating an upside resolution to biotech’s pause, wait for a breach of $ 64 in XBI, then grab the March $ 64 calls. They will probably be trading around $ 5 at that point. A breach of $ 64 carries the potential to lift shares to the next resistance level near $ 70, so consider that your price target.
Bears looking for XBI to fill its post-election gap could buy the Jan $ 61 put for $ 3.30. There’s no need to buy out to March if you’re looking to exploit a short-term move like this. If XBI breaks above $ 64, consider your dreams of a quick gap-fill dashed and exit swiftly to salvage whatever premium is left in your put.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.