As 2017 approaches and investors look to re-balance their portfolios, one sector that could be worth a closer look is biotechnology. Some investors are anticipating that U.S. President-elect Donald Trump will look to incentivize corporations to shift their stockpiles of foreign cash back to the U.S, which could trigger a resurgence in mergers and acquisitions. We’ll take a look at several charts below and try to determine if now is the time to buy. (For more, see: The Industry Handbook: Biotechnology).
SPDR S&P Biotech ETF
One of the most popular exchange-traded products used by retail investors for gaining exposure to U.S. biotechnology companies is the SPDR S&P Biotech ETF (XBI). In case you aren’t familiar, this fund is comprised of 85 holdings from across the biotechnology sector and it carries a reasonable gross expense ratio of 0.35%. Taking a look at the chart, you can see that the price was able to break above the resistance of the 200-day moving average back in mid-summer, which was a clear technical indication that the downtrend was in the process of reversing. Notice how the 200-day moving average is now acting as a strong level of support and how the price bounced higher from this level several times in recent months. Active traders would expect this behavior to continue and they will likely use the recent pullback toward the 200-day moving average as a buying opportunity because it is offering one of the best risk-to-reward scenarios of 2016. From a risk management perspective, traders will most likely place their stop-losses below $58.41 just in case.
Sarepta Therapeutics, Inc.
Often when investors look to allocate capital in sectors that they aren’t familiar with they turn to exchange traded funds such as XBI. However, active traders may want to take a closer look at the holdings of various funds to try and formulate a watchlist of the stocks that have the most promising chart patterns. One of the top holdings of the XBI fund, which matches the above criteria, is Sarepta Therapeutics, Inc. (SRPT). Taking a look at the chart, you can see that the price notched its 52-week high of $63.73 in September and that the price has fallen toward the support of its 200-day moving average ever since. Based on the nearby support, it appears as though the risk/reward scenario is now back in favor of the bulls and that a bounce higher in the first few months of 2017 could be a possibility. (For more on this topic, check out: The Ups and Downs Of Biotechnology).
Tesaro, Inc.
Based on the holdings of the XBI ETF, another company that could be worth a closer look is Tesaro, Inc. (TSRO). Based on the chart shown below, you’ll notice that the 50-day moving average (blue line) has consistently propped up the price on each attempted pullback since the breakout in late June. Active traders will expect the moving average to continue acting as a strong level of support and will likely look to place an order as close as possible to $124.88 in an attempt to maximize the risk/reward setup. (For more, see: A Primer On Biotech).
The Bottom Line
Recent pullbacks toward key support levels seem to be providing investors with some of the most lucrative risk/reward setups in all of 2016. Based on the analysis shown above, it appears as though biotechnology could be one of the sectors for active traders to consider increasing exposure to in 2017. (For more, see:Charts Suggest 2017 Will Be The Year of Biotech).
At the time of writing, Casey Murphy did not own shares of any of the companies mentioned in this article.
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