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Beleaguered biotechs about to rally: Charts

For the past several months biotech stocks have fallen out of favor on Wall Street. However, last week, the group started to rally broadly.

Are biotech stocks about to rally in a sustainable manner?

For insights, Jim Cramer turned to technical analysis from Ed Ponsi, an esteemed analyst who is also the managing direction of Barchetta Capital Mangement.

"Although I like to make my ultimate decisions based on the fundamentals, I find the charts can be extremely helpful," Cramer said.




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Because the iShares NASDAQ Biotechnology Index is an ETF made up of many different biotech stocks, Ponsi used it as a proxy for the sector broadly.

And looking at trendlines, Ponsi says last week, something happened that may be long-term bullish; the IBB quietly broke out above its 50-day moving average, a measure of the ETF's short-term trajectory.

It was the first time that happened since March, when it plummeted below the same key level.

In addition, Ponsi pointed out the IBB also broke out of a symmetrical triangle pattern that it had been making for weeks; breaking out of a traignel pattern is also considered bullish.

Those chart patterns, as well as others, suggest the sector could rally, broadly.

However, if you're looking for single stock opportunities, Ponsi also said the weekly chart of Celgene appeared promising with trendlines showing a bullish crossover in the Moving Average Convergence Divergence line.

Looking at fundamentals, Cramer also sees a bullish catalyst for Celgene. "It's trading at just 16 times next year's earnings estimates, which is kind of absurd for a company with a 25 percent long-term growth rate.

Elsewhere in the space, Ponsi noted that chart patterns for Regeneron appear bullish as do those for Isis Pharmaceutical.

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All told, Ponsi sees every reason for the the IBB to rally with patterns in the charts of Celgene, Regeneron, and Isis confirming the advance . "That would mean the monster sell-off has created some terrific buying opportunities," Cramer noted. "I think Ponsi is dead right."

Call Cramer: 1-800-743-CNBC

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Symbol
Price
 
Change
%Change
IBB
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CELG
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REGN
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ISIS
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