Trading Nation

This will send biotech stocks higher: Technician

Trading Nation: Biotech surges

The recent 13 percent surge in the Nasdaq biotech ETF (IBB) has investors questioning whether the rally is for real. But according to one technician, the gains are just the beginning of a much bigger breakout.

"I think that if you care about health care, then you're a buyer of biotech here," Evercore ISI technical analyst Rich Ross said Thursday on "Power Lunch." "You're on fire. You still have some genes to splice."

The IBB has traded below its 200-day moving average for the entire year, in sync with the overall downtrend of the health care sector. But by Ross' work, that steady underperformance gives the ETF a sturdy foundation to break through the moving average at approximately $300.

Further examination of the IBB's strength over the longer term, though, is what Ross says proves the resilience of the space. The ETF has managed to stay above its 200-week moving average for the last six years.

"We test and hold the 200-week moving average with a beautiful double bottom there," said Ross, pointing to the ETF's performance in 2016. "That double bottom is going to give us a springboard to higher prices."

Since the IBB's initial 40 percent decline from its top, the ETF managed to bounce twice off the 200-week moving average, 20 and 13 percent, respectively.

But not all market strategists see biotech as a sure-fire breakout, especially heading into election season.

"It could break out to the upside, but all you need are a few more tweets from Hillary Clinton or something along those lines, and it could go straight back down to $250 or even as low as $150," Dennis Davitt of Harvest Volatility Management said Thursday on "Power Lunch."

Back on September 21, 2015, the IBB fell 6 percent when presidential candidate Hillary Clinton took aim on Twitter at biotech and big pharma "price gouging."


Shares of the ETF are still down 21 percent since that tweet.

According to Davitt, if you want to make an options trade your best bet is to focus on post-election. He recommends buying IBB call options that expire in December.

"It's a very binary type market due to a lot of political events around it," said Davitt. "There's a lot going on here."