Betting on Biotech Breakdown

After a spectacular bull run of almost 375% from the 2011 bottom, the Biotech index (IBB) ran out of gas topping in July of last year. You can see price created a bear flag (#1) immediately after registering its last negative RSI momentum divergence.  The flag occurred around the 200 day moving average which was flattening but still in an uptrend and had provided important support in the past. The break out of flag #1 to the downside not only created the biggest and fastest decline of any week since the 2011 bottom, but also another bear flag (#2). Patterns on top of or within patterns occur in strongly trending markets (both bull and bear). At the top of flag #2 price tried to retake the 200day moving average but was rejected and began its next leg down, settling near the $250 mark.  Since then, Biotech’s have tried to reverse the downtrend but could only muster a couple of counter trend rallies each time petering out and falling back to retest that same $250 level which tells us its hot.  Not unexpectedly as with many corrective consolidation zones, this level marks the 50% fib retracement of the 2011-2015 bull run.

As with almost all stocks, Biotech’s took it on the chin last week and have once again settled back to the $250 … for the 4th time. We know the more price tests a level (from above or below) the greater the chance it will not hold. If the Brexit scare has more downside in store for stocks, I would expect IBB to fall in sympathy and the next level of support comes in the @212.5 range some 15% lower. Again, not so coincidentally, this turns out to be the 61.8% fib extension of the ’11-’15 bull market.

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Stepping back and reviewing Biotechs from 50ft, it's (now) obvious we are in a bear market with lower highs and lower lows being formed. Until we see a confirmed reversal formed from a recognizable bottoming pattern this is one investment that is on the AVOID list. That is, unless you are able to short as a breakdown below current support creates a very nice risk/reward entry.