In response to the previous update on QQQ & the market leading FAAMG stocks, member @natdicarlo posted the following comment:
Thanks Randy, IBB appears to be breaking out. Any thoughts on that as it might have implications on QQQ.
Although biotechs don’t have nearly as much of a weighting in the Nasdaq 100 (QQQ) as the technology sector, they do have a noticeable impact on the performance of QQQ. IBB is the iShares Nasdaq Biotechnology Index Fund ETF so let’s start there. Analyzing the daily chart, I see a breakdown & a near backtest of the bearish rising wedge pattern in IBB. Note how any marginal new high in the coming weeks will certainly be a divergent high. As such, any breakout soon runs in increased rate of failure.
IBB daily June 19th
Day traders & short-term swing traders often use LABU & LABD, the 3x leveraged bullish & bearish biotech ETFs that track the S&P® Biotechnology Select IndustryTM Index which is the same index tracked by XBI, the SPDR S&P Biotech ETF. I prefer to use the 1x (non-leveraged) ETFs vs. the leveraged ETF for charting purposes as the decay suffered over time from the use of leverage paints a distorted picture on the charts, with the charts of LABU & LABD hardly resembling the index they attempt to track when viewed over long periods of time.
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- XBI weekly June 19th
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- XBI daily June 19th
The bigger picture on XBI, as viewed on this 10-year weekly chart above, shows that despite some healthy gains since the early 2016 lows, we still only have a typical 61.8% retracement of the initial leg down off the 2015 highs & subsequent impulsive breakdown below the primary uptrend line in XBI. Zooming down to the daily time frame (2 year chart), the Nov 30, 2015 reaction high is resistance that XBI needs to clearly take out (by several days & several percentage points). As of now, today’s test of that level as well as any marginal gains in the coming sessions will still be a divergent high as the indicators are still making lower highs. As such, any breakout in the biotechs in the near-term runs an increased chance of failing.
Should the biotechs make a convincing breakout, i.e. -a breakout that last more than just a few days & by only a relatively small margin, they have the potential to burn through the divergences that are in place & quite possibly go on to take out the 2015 highs in the coming months. As of now, I would be skeptical of any breakout, especially if it is not confirmed with a marked expansion in volume.
On a final note, similar to the comment that I made regarding the solar stocks in the video published earlier today, I see mixed bag of technicals on the individual components of the biotech sector with some stocks looking bullish & others that appear poised to fall in the coming months. As such, I plan to post both long & short side trade setups in the biotech sector soon.