Back on July 30th in this post & video, when the biotech sector was roaring to new all-time highs in one of the most powerful bull markets of any sector in years, if not decades, I made a clear case that a top in the biotechs, to be followed by a bear market of at least 20% was imminent. That call was made a mere 10 days, or 8 trading sessions after the biotechs printed an all-time high on July 20th, with the sector plunging near 50% in under 7 months since then.
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- XBI weekly March 21st
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- PBE weekly March 21st
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- IBB weekly March 21st
I stated back in this post personally not only covering all my biotech shorts but also reversing to a long position within mere basis points the very morning of the very day the sector put in a meaningful bottom on Sept 29th, from that point the biotechs immediately rallied about 23% above the next 8 weeks, allowing me to not only side-step giving back any gains but also to add to my profits riding the bounce on the long-side. From there, my focus on the biotechs moved away from the typical swing trade (multi-week/multi-month) strategy to more of an active trading strategy with day trades & short-term swing trades measured in days to stepping aside from the sector altogether.
So where to do the biotechs go from here? Great question & the main reasoning behind this post. A link to the original video calling for a bear market in the biotech stocks, as well as a summary of what has occurred since & how we were able to trade it is to provide a bigger picture overview of what has happened leading up to the top in the biotech sector and just as importantly, what has happened since, which helps to formulate my analysis or outlook on where the sector is likely headed next.
Some of the more salient technical developments are highlighted on these weekly charts of some of the more popular biotech sector ETFs: XBI, PBE & IBB. I'm not yet ready to pull the trigger on the next long-term swing short entry but should the broad markets start to roll over soon in a convincing manner along with these major biotech ETFs breaking down from these weekly bear flag pattern, my preferred shorting proxy, as was stated back on July 30th, will once again be to short LABU (3x bullish biotech etf), which has the potential to once again provide gains comparable to the 85% profit booked on the last official swing short trade that was closed out here on February 3rd, just 4 days before the sector bottomed so far in 2016.
Interesting. I was just thinking that if we got a nice healthy correction in the market, I would look to go long LABU … never thought of shorting it on the way down.
tater123, If positioning for what will likely be a multi-week or especially a multi-month swing trade, either long or short, I prefer to short the opposite (bullish or bearish) 3x etf as to let the decay work for me vs. against my position. LABU happened to head nearly straight down from Aug 7th (official short entry) to Feb 3rd (official cover/closing date) but the decay component works even better in a choppy/sideways market). Of course, first & foremost I’d only enter the trade if I though that the price was likely headed lower. Still waiting patiently for now before shorting LABU again, need to see a little more evidence to confirm an entry.
Funny… you raise this now… I started an IBB put calendar spread last week… it’s bounced some since then..but I am obviously expecting it to roll over soon with the markets.. will see.. Shorting LABU is a nice idea too!
IBB rolling over and declining should also have a similar impact on IWM of which I am short
@rsotc Excellent Randy as I had also been taking closer looks at Biotechs short term ( very short term ) there may be some upward popping opportunities IF we have some sideways to drift up in the general indexes as Biotechs ( or some of them anyway ) play just a bit of catch up and perhaps benefit from some incremental sector rotation under the covers as they potential hold the indexes up. Anyway just short term those views. Certainly it would be swimming against the tide ( or standing in front of the train ) since I 100% agree that medium to longer term Biotechs are still in quite some technical trouble. If the sector which lead on the way up essentially completely failed to participate in the recent rally then once that rally is exhausted this sector resume it’s paused decent. They still have a ways to fall considering how elevated they were on the way up. Not sure if anyone has checked the components of the Biotech ETF’s but I ran thru them the other day and fundamentally the vast majority of them have terrible financials and fundamentals. So, just like the Dot COM bubble, they bubbled up as a group on hype and promise rather than fundamentals. And ultimately in the longer term the fundamentals do matter! For sure there are some gems and longer term ( once the markets “reset”, if they “reset ) there will be, just like any other sector, some fantastic opportunities I’d imagine on curated set of them Anyway, back to the technical’s and the “right side of the chart” now.