It’s been quite an explosive start to the New Year with a broad-based rally that has close to 200 stocks in the U.S. markets up 10% or more so far after only 8 days of trading. Dominating this list of top performers are many Energy and Medical related stocks with the highest gaining sub-group both in number of stocks and percent improvement year-to-date being in Biotechnology stocks.
While the move into these highly speculative Biotech stocks points to an improved appetite for risk among already bullish investors, these stocks can be hard to embrace simply because the financials are often not there. Many of these companies are pouring money into research and development and have products that are years away from possibly making it to the market. Without solid earnings and sales, buying the promise of a cure that may or may not materialize can be unnerving.
For those that are willing to jump into this area despite a lack of the strong fundamentals that typically drive a stock higher, using technical indicators on your price chart will be your guide to finding entry and exit points. And while the upside gains in some of these stocks can be spectacular, investors must be on alert for the inherent volatility as the price may gyrate in response to the latest headline or the ebb and flow of the market’s interest in these stocks.
Like most industry groups in the markets, there are pockets of strength within Biotechs that can be played by a savvy investor. Currently, the stocks that are picking up the most are involved in cutting edge treatments for cancer patients. From prolonging the life of leukemia patients to drugs that stave off nausea and vomiting following chemotherapy, the strides being made in this area of healthcare are monumental and investors are taking note.
Below are examples of how you can use technical indicators to spot stocks in this area that are poised to go higher. The first example is a stock that broke out of a base several weeks ago and has continued higher while the remaining stock breakouts are all more recent or have not yet occurred. Notated on the charts are the common characteristics that should tip the odds of price appreciation in their favor.
These include the fact that their current price is above key moving averages and those MAVs are in an uptrend. If you’re viewing a daily chart, the price must at least be above its 50-day MAV and ideally, also be above its 10-day MAV. For those that use a weekly chart, the price must be above its 10-week moving average.
Other highlighted indicators include a positive RSI and MACD. These metrics are quite simple and from there you can of course add other indicators. Lastly, you’ll want to make sure that the Industry Group itself is in a positive uptrend by looking at a Biotech ETF such as IBB (Nasdaq Biotech Index). This uptrend in the group will provide the “wind behind your sails” and enhance the possibility of a continued upward move in your stock as studies have shown that group affiliation is a major component of your stocks move up or down as groups move in and out of favor.
WEEKLY CHART OF GLYC – BROKE OUT 3 WEEKS AGO
DAILY CHART OF MYOK – BROKE OUT OF BASE THIS WEEK
WEEKLY CHART OF IMGN – POISED TO BREAK OUT OF BASE
DAILY CHART OF BIOTECHNOLOGY ETF
Mary Ellen McGonagle
President, MEM Investment Research
Mary Ellen is the founder of MEM Investment Research which provides equity analysis and research to both Institutions and individual investors. You can email her using the link above if you’d like to trial her top performing newsletter.