Investors Sniffing Around Biotech Companies Again

The healthcare sector has been especially weak throughout much of this year, dragged down primarily by biotechnology firms. In an environment of fear and a global market sell-off this is no surprise as biotechs are one of the riskier areas to invest in and were trading well above their earnings (many have very high PE ratios).

However, with the major US stocks indices approaching close to their all time highs again, courtesy of another round of central bank intervention, it appears an increasing number of investors are sniffing around the biotech sector again. It is still unclear whether this is an epic bear market rally or the start of a new bull market, however for a bull market you would expect the more aggressive stocks to pick and take over as leaders.

IBB Biotech iShares breaks MA50 for the first time in 3 months

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In the chart above the most recent developments was price just closed well above its 50 day moving average. This is clearly a positive move. It also looks like  price may be forming what looks like a double bottom or an ascending triangle, both of which are positive bullish chart patterns. The break above its 50 day moving average was on a long white candlestick on decent volume. We can see on the percentage volume oscillator (bottom of chart) that it bottomed in late November and since then has continued to climb now testing positive territory again. This shows there is volume behind the movement and that increasing investors are showing interest in biotech companies.

Next resistance at 280

I have marked out the next area of resistance around 280, which is the apex of a previous bear pennant chart pattern (now shown) and the 38% Fibonacci line for the January decline.

Conclusion

Given that the general stock market is now extremely overbought and volume continues to decline this presents a ripe opportunity for a pull-back. If this is a bear market rally the down-trend continue, in which case biotech companies will once again nosedive and lead the stock markets lower. However, if the stock market holds up with horizontal consolidation or a minor sell-off it may indicate the start of a new bull market. If the latter occurs and biotech companies continue to improve then this would further bolster the case for a bull market.

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