Biotech has just “broken the box”…
For the last few months, Growth Stock Wire readers have been following the “stealth biotech boom.” Biotech stocks are enjoying a big uptrend… but you rarely see it mentioned in the mainstream press.
We’re particularly interested in this uptrend because biotech is one of the greatest “boom and bust” sectors known to man. Thus, the sector is a good friend for the speculator. Ride the booms and avoid (or even short) the busts, and you can make a fortune.
The biotech sector shares many characteristics with the resource sector. Like mining exploration firms, many biotechs burn through cash in search of the “next big thing.” When a firm strikes it rich, the returns can easily go into the thousands of percent.
For this reason, both sectors tend to draw in “hot money” every few years and go through huge speculative booms… which are followed by big busts.
You can gauge which way the biotech wind is blowing with the SPDR Biotech Fund (XBI), which holds more than 50 companies in the sector.
The summer 2011 selloff clobbered XBI. It then began a big recovery, gaining nearly 50% in about six months. For most of 2012, it’s been “digesting” those gains and moving sideways.
Traders often call this sideways trading pattern a “box.” Famed trader Nicolas Darvas, author of How I Made $2,000,000 in the Stock Market, popularized the term. The bottom of the box is formed by the lower limits of the price range. The top of the box is formed by the upper limits of the price range.
As you can see in the chart below, XBI recently broke above the top of its “box”… and struck a new 52-week high. Another impressive achievement from biotech: During last Thursday’s huge selloff, XBI actually climbed. It’s bullish when a sector holds steady in the face of a broad market decline.
You can buy individual biotech names to trade this trend. But selecting individual winners is a tough game… even for professionals.
Most folks are better off with investment funds that contain a broad basket of biotech names. XBI offers the most diverse exposure to both large- and small-cap biotech names. The Biotech iShares Fund (IBB) is the most widely owned biotech fund. It tracks the Nasdaq biotech index with minimal expenses.
If the market is able to digest last Thursday’s horrible selloff, collect itself, and work higher, biotech will lead the way.
Amber Lee Mason and Brian Hunt
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