Biotechnology stocks are setting up for a BIG move.
Look at this chart of the iShares Nasdaq Biotechnology ETF (IBB)…
Biotechnology has been one of the hottest sectors in the market over the past 10 months. After bottoming near $112 per share last April, IBB rallied all the way up to $175 – a gain of 56% – by late-November. Since then, though, the fund has been stuck in a tight, 10-point trading range.
This action has allowed the momentum indicators at the bottom of the chart to back off from their overbought conditions. They are now firmly in neutral territory.
In addition, the various moving averages – which had expanded far away from each other during the rally phase – have now coiled together. Energy is building to fuel the next big move.
And, that “next big move” is likely to start when IBB breaks out of the consolidating triangle formation (the dashed red lines on the chart) that has formed over the past several weeks.
The obvious question, of course, is “which way?”
Consolidating triangle patterns don’t favor one direction over the other. They tell us a big move is coming. But, they don’t indicate whether that move is likely to be bullish or bearish. So, we have to look at other factors – like seasonality.
When it comes to stocks, the term “seasonality” refers to the typical behavior of the stock price during a specified time period. And, for IBB the next several weeks tend to lean bearish.
In fact, according to TradeSmith’s Seasonality Screener, from now until late-March IBB declines 67% of the time. And, the average decline is about 2.35%. Though, in 2023 IBB dropped over 23% during this time frame.
So, with the biotech sector on the verge of a large move, and with seasonal winds blowing bearish, traders should hold off on buying biotech stocks at the moment. We’ll likely have a much better chance to jump into the sector a few weeks from now.
Best regards and good trading,
Jeff Clark
Editor, Market Minute