A Potential Reversal Pattern in the Biotech Sector
Biotechnology is defined as the use of living systems and organisms to develop or make products, or "any technological application that uses biological systems, living organisms, or derivatives thereof, to make or modify products or processes for specific use" (UN Convention on Biological Diversity). The recent dramatic improvements and progresses in research and achievements in this sector reveal a considerable potential for the improvement of the quality of life but also for the creation of economic value. Therefore, biotech can be considered as key industry for the century.
Nevertheless, the values of the stocks related to this industry had been pounded by the markets last year, in part for political reasons related to the uncertainties raised by the potential effects of the policies prospected by the candidates to the presidency in the U.S.A. It’s a fact, while the Standard & Poor’s 500 soared around 9% in 2016, the Nasdaq Biotechnology Index decreased 20%. A loss that was almost recovered by a rally in the first half of this year, favored, at least in its early stage, by the victory of Donald Trump, a president that is supposed to favor the streamlining of the Food and Drug Administration’s drug-approval process. Yet, much of the improvement is due to better returns, as the quarterly figures of the related companies are likely to confirm.
But which perspective is now foreseeable for this sector? From a technical standpoint, the late June rally of the Biotech index produced an important breakout. A look at the chart of the iShares Nasdaq Biotechnology (IBB), a related exchange traded fund, shows that all the swings around the lows have formed, in 2016, an accumulation that has been concluded by the breakout of the resistance 300/305 that occurred the 20th of June of this year. Since then, a consistent rally pushed the IBB to 320 but the move was too fast and was followed by a sudden pull-back. Nevertheless, the reversal pattern of 2016 is still in place and its next potential target is around 340, a 62% retracement of the 2015 downtrend but also an important resistance in late 2015.
Figure 1: iShares Nasdaq Biotechnology (IBB). Weekly data since 2013. A solid trend reversal pattern is forming since 2016. It was concluded last month by the breakout of the resistance of the last twelve months.
Figure 2: Relative trend of the iShares Nasdaq Biotechnology (IBB) against the S&P500 since 2013. The comparative trend of the sector against the S&P500 has been very strong until June 2015 and then the Biotech underperformed significantly through the first half of 2017. The IBB is regaining strength but did not reverse yet its negative relative course.
Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.