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What’s next: A pullback and consolidation in biotech stocks

Kyle DennisKyle Dennis ·

The setup: I’m a biotech investor and bullish overall on the iShares Nasdaq Biotechnology ETF (IBB), which I think can reach all-time highs of roughly $400 within the next year. But with a great run in the books from $257 in October 2016 to $332 at the close on Thursday, I’m expecting a little pullback.

Why IBB’s uptrend will stop now: We had a nice run-up to the European Society for Medical Oncology (ESMO) conference that ran from Sept. 8-12, where a lot of cancer companies presented important data. We saw a lot of small-cap companies — and some large-cap ones — run up in advance of that event and I now would expect the IBB to pull back and consolidate in the $315-$320 range, at which point, I would get more aggressive and go long again to the end of the year.

The catalysts: The end of the year is really strong for biotech. The American Society of Hematology (ASH) — which usually includes a lot of companies reporting significant data – is in December, followed in early January by the big J.C. Morgan Healthcare Conference, so I expect to see biotech running up in November and December. It would be beneficial if the index pulled back a little bit now, which would let us get long in October to make the most of that expected year-end run-up.

What to do now: Traders need to be cautious about initiating brand-new positions in biotech right now. Look to take profits off the table and start thinking about the best moves to make in the fourth quarter.

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Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  He currently has no shares, options or open orders in IBB.

 

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