In this article we’ll look at the price patterns developing in the charts of two leading bio-tech sector ETFs as there has been a significant development in the sector. As of this week the bio-tech sector is showing signs of renewed strength, which could last for a little while.
The most active bio-tech ETF by volume (average volume of approximately 4.0 million shares), is the SPDR S&P Bio-tech ETF (XBI). XBI broke out of a three-month rectangle consolidation pattern at the beginning of the week as it closed above $72.58. That move triggered a continuation of the 16-month uptrend that began off the February 2016 lows. The rectangle pattern followed the formation and breakout of a four-month symmetrical triangle pattern on a rally above $67.19. The rectangle formed right around support of the 40-week exponential moving average (ema), while the previous triangle formed both above and below the 40-week ema. The 40-week ema is equivalent to the 200-day ema long-term trend indicator.
This developing relationship between the 40-week ema and the price patterns is a sign that the long-term uptrend is strengthening. The increase in the angle of ascent can also be seen by looking at the change in slope of the two uptrend lines shown on the enclosed XBI chart. Consequently, upward momentum has the potential to accelerate over time from this new breakout.
Since the breakout triggered a trend continuation this could be the beginning of a multi-week or multi-month move. Based on the patterns alone minimal targets are $79.16 derived from the rectangle pattern, and $81.92 for the triangle formation (breakout occurred on move above $66.91).
Another ETF that can be used to take advantage of renewed strength in the biotech sector is the Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU). It’s most recent average volume is around 1.6 million shares. LABU seeks daily investment results, before fees and expenses, of 300% of the performance of the S&P Biotechnology Select Industry Index. Therefore, the benefit increases but also the risk, as it moves faster than XBI to the upside and to the downside. Because of its inherent leverage it should only be used by experienced market participants.
LABU broke out of a large seven-month ascending triangle chart formation on Monday as it closed above the $55.88 breakout level on above average volume. The long-term target derived from the pattern alone in regards to price is around $87.32. This provides plenty of potential upside.
To find targets for these patterns the price range is measured from the high to low of the pattern and then that value is added to the breakout level. That is usually a satisfactory methodology to determine a minimum target. However, for LABU the range on a percentage basis is relatively significant at 128.6 per cent, compared to the rectangle for XBI, which is around 10 per cent. Therefore, a target based on a percentage measurement is also being included in this analysis. On a percentage basis the target comes in at $71.88. Since it a lower price it is more conservative and therefore also has a higher probability of being reached compared to the $87.32 target.
In the short-term the price of both XBI and LABU are extended and do not provide good reward relative to risk. Given that the breakouts just happened, new entry opportunities will develop during retracements in preparation for a continuation of the new trend segment begun from the breakout. Investor sentiment can be expected to continue to improve during this process given the long-term nature of the consolidation patterns.
In general, for the bullish nature of the XBI breakout to be maintained retracements should not dip below the half way point of the pattern price structure, which is at approximately $69.29. It fails on a decline below the bottom of the pattern at $66.00. For LABU, if during a retracement it falls below $47.47 the success of the breakout becomes questionable, and it fails on a drop below $44.45.