Surging Illumina Lights the Way

Talking about biotechnology stocks makes us cringe. This sector is one of the toughest groups for a technician to deal with -- the stocks are completely event-driven, and bullish or bearish trends in the sector can reverse on a dime depending on FDA drug approvals or clinical trial results.

With that said, the group is taking the offensive. We're seeing bullish rotation toward the sector as traders look for a recession-proof group with some upside potential and beta. The wind is at the sector's back, and we're seeing some interesting stocks moving higher in the group. One charging name in the sector is Illumina (ILMN - commentary - Cramer's Take).

Illumina makes next-generation life science tools and systems used in the large-scale analysis of genetic variation and biological function. The company makes "DNA chips" necessary to perform the billions of genetic tests drug companies use to screen for potentially valuable compounds. Illumina essentially makes it easier for drug companies to sort through the millions of compounds and focus on the most likely candidates to become meaningful drugs.

We like the fact that Illumina makes the tools for biotechnology research -- the company is not involved in the actual development of the drugs. Illumina is like the arms dealer in the biotech war. Illumina reported earnings Tuesday and showed a 66% increase in earnings and revenues for the second quarter. The company also raised third-quarter and total-year guidance. Illumina's business is clearly showing healthy growth.

Illumina (ILMN)

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ILMN has a bullish technical setup in place. The stock is holding an orderly and persistent uptrend channel dating back to last summer. While the stock has shown some choppy behavior in the past, the volatility has been contained within the context of the trend channel. We like strong persistent uptrend channels.

ILMN jumped on the bullish earnings news Wednesday, and the stock broke out to an all-time high. The breakout reasserts the primary uptrend and suggests that the trend should persist.

The stock may consolidate the gains after the surge higher, and we would use any weakness to get long this name. Traders should look to get long ILMN on any pullback to around $90 and place a stop loss at $81.90, which would take the stock off of the offensive in the short term.

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At the time of publication, John Hughes and Scott Maragioglio were long ILMN. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.