The biotechnology space spent the first half of 2016 in a sideways consolidation pattern but has been making a comeback in the second half of the year. There are a number of stocks in the space that are breaking out of bullish patterns or bouncing off moving average support and look to continue higher, but trading individual names in this highly volatile sector is not for everyone.
One alternative is using an exchange-traded fund to moderate volatility and allow exposure to this potentially profitable sector.
The daily chart of the iShares Biotechnology ETF (IBB) - Get Report shows it breaking down from a triangle pattern that formed at the end of last year and dropping sharply to its February low. It was able to bounce off that low and retrace nearly half of the decline from the triangle high. A second pullback and another retest of the low formed a horizontal channel pattern between resistance in the $290 area and support at the $240 level.
Last month, the top end of the channel was penetrated, but the breakout promptly failed, taking the fund price back down to the 38% retracement level. Following a "golden" cross of the 50-day moving average over the 200-day average, the stock was able to reverse direction off the latest retracement level and return to the upward trajectory of the original trend. This pullback process is a classic technical procedure often referred to as an A-B-C move that consolidates gains after a move higher and then, refreshed, resumes the primary trend higher. It also offers the opportunity to highlight a technical tool called the Andrews Pitchfork, which uses three data points to draw two equidistant trend lines above and below a median line. It delineates the trajectory of parallel paths of the primary uptrend which are used as potential support and resistance trend lines.
Moving average convergence/divergence made a bullish crossover just above its center line, and the relative strength index has crossed above both its 21-period average and center line. These readings reflect the positive momentum of the last two months and suggest that it should continue over at least the short term. The vortex indicator, which is designed to identify early shifts in trend, has made a bullish green-over-red crossover, confirming the bounce this month as the resumption of the earlier uptrend. Chaikin money flow is still in negative territory but has been improving, while the Chaikin oscillator, which uses shorter money flow averages in its calculation, has crossed above its center line.
The next upside hurdle is the small resistance zone between the August high and the 62% retracement level, but because of the current risk/reward ratio, the ETF is a long candidate at its present level using the combination of the lower pitchfork uptrend line and the rising 50-day moving average as a stop loss level.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.