The back story: I have never traded the iShares Nasdaq Biotechnology ETF, but I monitor it as a gauge on when to get into or out of individual names. That said, some traders prefer to play the ETF rather than a few of the underlying stocks themselves.
Why others are buying today: Senate Republicans unveil the details of their plan to repeal ObamaCare today, and the IBB has run up big-time in anticipation, gaining about 13 percent over the last three days. Investors are betting that President Trump won’t fail in his second attempt at a health-care bill, so they are buying that rumor, hoping to sell higher on the news.
Why I’m not: While I am long-term positive about the sector and IBB, I expect a short-term pullback to support, which would put IBB in the $295 to $300 range. I took profits on the upswing this week, selling four of the six biotech stocks I held when the rally started.
My next move: I’m waiting to see when I can buy back into biotech on the dip. Again, for me it will be using individual stocks, but when the IBB pulls back to about $300, I’ll get interested in the sector again. Alternatively, I could be convinced to reconsider the sector if we see a period of sideways consolidation that shows support and proves that there is new money flowing in to match the profit-takers out there.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. At the time this article was published on RagingBull.com, he had he had no open positions, options or orders in IBB and had never traded the ETF. As noted in the article, he uses IBB as a sentiment indicator for biotech stocks.