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.
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.