How To Play The Biotech Bust

NASDAQ:IBB   iShares Biotechnology ETF
Biotech stocks had tremendous runs over the last few years. Many advancing several hundred percent. But all good things in the stock market come to end, and the biotech group is no exception.

The advance over the last four to five years clearly reflected the improved growth rates that we saw biotech companies deliver over those years, and current fundamentals remain strong. Unfortunately, analysts have been revising their estimates downward, and now expect a major deceleration in growth over the next three years.

From a technical stand point, biotech stocks are clearly the weakest group in the medical sector and stock market. They are ranked at the bottom of the Investor’s Business Daily’s Industry Groups.

The group, as reflected by the Ishares Biotech ETF (IBB), has dropped over 40% since the market topped in July 2015, after advancing over 400% since 2011. On average, former leading stocks and groups, drop over 60% after topping.

How To Play The Biotech Bust
There are several options traders have to capitalize on the bust. They can short individual biotech stocks, or they can buy and/or short biotech ETFs. There are three ETFs that can be traded to take advantage of any biotech sell off.

The Ishares Biotech ETF (IBB) has pulled back to its fifty day moving average in low volume, after breaking down from a bearish head and shoulder base, in heavy volume, at the beginning of the year.

The ETF can be shorted right around the fifty day moving average as volume continues to dry up, or breaks down, in heavy volume, below $242.

Ishares Biotech ETF IBB
Ishares Biotech ETF (IBB) Pullback To 50 DMA in Low Volume

Aggressive traders can consider going long two biotech leveraged ETFs. The ProShares Ultra Short Nasdaq Biotechnology ETF (BIS), 2x leverage, or the Proshares Ultra Pro Short Nasdaq Biotechnology ETF (ZBIO), 3x leverage.

The entry point would be at the same time as the Ishares Biotech ETF (IBB) either stalls or rallies to the fifty day moving average in low volume, or starts to break down in heavy volume.

Whichever route you choose, the market will have to trend lower. As much as the group has wanted to break down over the last few weeks, it has been held up by the market’s rally attempt. But based on the poor relative strength of the stocks and ETFs that represent the group, it is clear, at least for now, the group wants to go lower.


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