Two days ago, I wrote about the importance of seeing the bigger picture in the overall market and the biotech sector.

Since writing that article, both the overall market and the biotech sector have come into significant support, and it remains vital to be aware of critical long-term levels.

This is incredibly interesting as the market is now at a potential inflection point. The Battle between bulls and bears has commenced!

As I mentioned in the article on Monday:

Well, yesterday, the IBB broke below this crucial level ever so slightly.

In the future, two potential opportunities could arise. Either the sector can recover and bounce back towards the channel’s resistance, or the IBB holds below support and gains momentum towards the next level of support.

With these two scenarios in mind, let’s go over a plan for each.

Biotech’s Breakdown

If the biotech sector fails to reclaim support and stabilize higher, it is good to be armed with a plan.

I am not suggesting that this is likely to happen. Instead, I am suggesting that it is always wise to be prepared for the various outcomes and possibilities of the market.

Relative weakness will be fundamental here. To brush up on your relative strength and weakness knowledge, check out this article I wrote.

If the sector corrects, then a short opportunity could present itself. If that is the case, it might be easier to go for the weakest names in the sector rather than shorting names that have shown relative strength to the sector.

For example:

AMGN, the second-largest weighted stock in the IBB, is negative 6.04% year to date, while the IBB is up 12.17%.

AMGN has consistently been relatively weak to the IBB.

The stock has been a consistent downtrend, as it fastly approached the 52w low of $210.28. AMGN might be a decent short if the IBB were to break down as it has performed worse than the sector.

Biotechs Recover and Breakout

For the biotech sector to recover, the bulls will need to regain control, and the stock will need to base above support.

As I mentioned on Monday:

If the stock can reclaim and hold firmly above the support of the upward trendline, then the above could happen.

So, If the IBB does recover, what would the game plan be?

Like the breakdown section, I would be looking at stocks that have shown relative strength to the sector.

For example:

GILD continues to hold firmly above the uptrend’s support while also holding above the previous breakout resistance of $70.

Year to date, the stock is up 20.92%, compared to the 12.17% in the IBB.

If the IBB recovers, then GILD, being the third-largest weighting in the IBB, might experience a fast move back towards the resistance.

Another relative strength example and potential bounce play is IQV. The stock is up 43.75% year to date and has an average target price set by analysts of $278.16. It is the ninth-largest holding in the IBB.

This stock, similar to GILD, continues to base over support of the upward channel. This is bullish as a recovery and up move in the IBB might result in the stock consolidating higher and achieving new highs.


The Bottom Line

As I have said before, no one knows what will happen next in the market. However, it is possible to prepare for the many potential outcomes and possibilities so that you can react faster and more decisively when a move occurs.


RagingBull is the foremost trading education website where traders of all skill and experience levels can learn to trade or to become a better trader. Students can learn from experienced stock and options traders, and be alerted to the real money trades these traders make. Become a better trader with RagingBull.com's courses and programs.

Learn More


Leave your comment