This column was originally published on RealMoney on July 21 at 11:09 a.m. EDT.

Biotech stocks have turned in an impressive performance so far in 2005. Though the broad averages didn't bottom out until April, the Biotech Index (BTK) found its low in February and has been charging higher in a powerful uptrend since then.

Is it getting too late to find good opportunities in the sector? Not by a long shot.

The London bombings on July 7 gave us a striking example of biotech's resiliency. The group didn't sell off at all on that volatile day, and there was a precedent for this remarkable strength: It was the top-performing sector when the markets reopened after Sept. 11, 2001.

The Biotech Index broke out of a long-term basing pattern just three weeks ago. This suggests the current up leg is just starting and could last for many months. Of course there will be sharp pullbacks along the way, and the sector might even test support near 575. If that happens, consider it a low-risk buying opportunity.

Biotechnology is a tough business with complex fundamentals. But its diverse components offer a great place to watch greed and fear carry price into profitable entry points. There are several keys to making money in this volatile sector.

First, respect the key difference between big-cap biotechs and the plethora of junior biotechs listed on the exchanges. Simply put, the big-caps make money and the little guys don't. And the juniors need a constant flow of press releases and clinical studies to attract investor interest.

Big-cap biotechs can move nowhere for months, shaking out traders trying to capture the smallest gains. But their moves can be dramatic when they wake up from the dead. For example, mega-cap



has already risen over 30 points this year.

But timing is everything, and most biotechs look overextended here. Fortunately, a number of sector plays are just developing. Let's look at four lesser-known issues that show considerable promise in the weeks ahead.



(ILMN) - Get Report

develops biological tools for genetic analysis. Its chart shows a number of similarities with the broad Biotech Index. Price broke above long-term resistance in early June and rocketed higher in the last month. The move brought the stock into a test of its four-year high near $15.

Price is now congesting just below this level, and it could go either way at this juncture. This pattern favors a stalking strategy that waits on the sidelines for the stock to make up its mind. Then execute a bilateral technique that buys a breakout from congestion or a selloff to support below $13, whichever comes first.

Idenix Pharmaceuticals

Idenix Pharmaceuticals


came public in July 2004 just over $14. The company engages in the development of drugs for the treatment of human viral and other infectious diseases. The stock broke out of a four-month basing pattern late last week and has reached the upper $20s in a three-day slingshot.

The current move is near exhaustion, so the best entry will come on a pullback to the breakout level. I recommend traders stand aside, watch closely and wait for the current move to flame out. Then look for a pullback that lasts a minimum of one to two weeks. A patient approach should allow a low-risk position well below $25.

Regeneron Pharmaceutical

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Regeneron Pharmaceuticals

(REGN) - Get Report

has a wide variety of pipeline products for the treatment of cancer, diseases of the eye, rheumatoid arthritis, allergies, asthma, obesity and other diseases. In past years the company has suffered from an abundance of bad news, which is reflected in its habitual underperformance in the biotech sector.

The stock is attracting renewed interest right now, with price breaking out of multiyear resistance at $9.50 on Wednesday. The next strategy is to stand aside and wait for the stock to reverse at the June 2004 resistance. The next pullback will issue a reliable "Rule of 10" buy signal when it drops below $10 and then remounts that important number.

Encysive Pharmaceuticals

Longtime readers know I've been a fan of

Encysive Pharmaceuticals


for several years. This company develops a series of compounds that address cardiovascular and inflammatory diseases. The stock had moved sideways since early 2004 but now shows a bullish appearance, following a breakout over $12.

Notice that odd February 2005 reversal bar. It's likely that the stock will pull back until it tags the opening level of that trading day. A well-placed limit order could capture an excellent entry at this price, for a quick recovery to this week's high. Look for this stock to move substantially higher in the months ahead.

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Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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