Biotech Is At A Crossroads

The State Of XBI

SPDR S&P Biotech (NYSE:XBI) is the ETF that tracks an index of biotech stocks. Recently, there's been chatter that XBI is close to a breakout point and that it is nearing an inflection point.

Figure 1 displays a daily chart for XBI and appears to show an obvious resistance level. Technically speaking, if XBI can break out above this level then a move to higher prices may follow.

Does Daily XBI Show A Breakout Point?

Figure 1: Courtesy AIQ TradingExpert

Does Weekly XBI Shows Resistance?

From this one chart XBI appears to be on the cusp of a breakout. However, if we zoom out, we get a potentially different perspective. Figure 2 is XBI's weekly chart with the same resistance level highlighted. Does the line seem as significant now? Or does it just lead to more overhead resistance?

Figure 2: Courtesy AIQ TradingExpert

Finally, let’s consider one more viewpoint. Figure 3 looks at the recent rally from the early 2016 low as a percentage retracement from the 2015 high. As you can see, the recent highs in the $72-$74 range are right at the 61.8% retracement level, which Fibonacci adherents consider to be highly significant.

Has Monthly XBI Run Out Of Steam At 61.8% Retracement Level?

Figure 3: Courtesy ProfitSource by HUBB

So yes, XBI is at an important inflection point. What to do from here? It's worth noting that the implied volatility for XBI options are at an extremely low level, as displayed in Figure 4.

Implied Volatility At 4-year Low

Figure 4: Courtesy www.OptionsAnalysis.com

Summary

I'm inclined to think that recent resistance will hold and that biotech will decline in the not-too-distant future.

The Above Suggests:

1. A decent trade is brewing in biotech stocks.
2. If you're pondering a trade, consider buying call or put options (or maybe both) as a solid low dollar risk way to play versus buying or selling shares of XBI at $70+ a share.

I'm not taking a position at this point, but I do believe that XBI is headed lower in the months ahead.

This Positon: buy 1 XBI September 70 put, which has four months left until expiration. Total dollar risk is $455 and profit potential is limitless if XBI declines in price.

Figure 5: Courtesy www.OptionsAnalysis.com