It’s been a tough week for the bulls. For the moment, in the short term, the bears are winning the battle.
As I am writing this, the market is gapping lower on Friday morning, and the SPY is currently down 1.18% on the week.
Take a look at this heat map which is predominantly red across the board. The map from Finviz includes S&P 500 stocks categorized by sectors and industries. The difference in size represents the market cap.
Interestingly, the healthcare industry is the clear outlier, with that section of the map the greenest.
While the health care SPDR ETF, XLV, is up 1.87% on the week, the biotech sector ETF, IBB, is down 2.73% on the week so far.
The above chart is an overlay of the IBB and the XLV. The pink line represents IBB.
Up until this week, the biotechs had been showing relative strength to the healthcare industry. However, recently selling has taken place in some biotech stocks, which has caused the sector to pull back. The XLV is now showing relative strength to the IBB.
To gain an overall view of the biotech sector, I need to first look at the sector as a whole and then some of the names that hold the largest weighting within the sector.
Although the IBB is down 2.73% on the week, the ETF remains up 8.17% on the quarter, 8.67% year to date, and 23.05% over a year.
It’s important always to note where a stock has come from. In the case of the IBB, the ETF came from $145 in May and, over three months, made a new all-time high of $177.37. That’s an impressive move, and so I am not at all surprised that the IBB is taking a breather and pulling into support.
Currently, the IBB has retraced to the 50d SMA, where the stock closed on Thursday. This level is also the upward trend support since making a low in May. Ideally, the IBB will hold this area and make a higher low.
If the IBB fails to find support in this area, the next area of support and interest will be the $160 area.
Moderna, according to MarketWatch, is currently the top-weighted stock in IBB with a weighting of 9.07%.
Based on this weighting, it’s essential to analyze the stock’s performance as volatility in MRNA will impact the performance of the IBB ETF.
MRNA, which needs no introduction, has experienced mouth-watering gains so far this year. Even after experiencing a sharp pullback, the stock remains up 16.95% on the month, 126.26% on the quarter, and 452.25% over a year.
This week, however, the stock is down 4.06%. This negative performance has spilled over in the IBB.
For MRNA, and the IBB, the stock must find support within the $350 area. $350 is a significant support area because it acted as resistance before the stock broke out and ultimately made new all-time highs. As the stock approaches this key level, the bulls will want to see it turn into support.
The second-highest weighted symbol in the IBB is AMGN, with a 7.73% weighting. AMGN has displayed relative weakness to the sector and industry. The stock is down 1.65% on the week, down 10.93% on the quarter, and negative 6.69% over the year.
Over the last two days, the stock has broken down after failing to hold above $230. Shares are now quickly approaching a critical area of support, around $220. A move below $220 could signal a higher time frame breakdown, which would be bearish for the stock and bearish for the IBB as AMGN holds a significant weighting in the ETF.
The Bottom Line
As I mentioned, the IBB had an impressive run over the last three months. After bottoming in May, the stock recovered and soared to new all-time highs. Therefore, a pullback in the sector is warranted. In the future, all eyes will be on critical levels of support in the IBB and the stocks that make up the IBB.
For the IBB to recover, it will be necessary for the bulls to take control around crucial levels of support. If the bulls fail to do so, the pullback might turn into a breakdown.