Trading Nation

A moment of truth for biotech stocks

Key Points
  • Some strategists see further upside for the IBB, which tracks the performance of biotech stocks.
  • Piper Jaffray's Craig Johnson said $300 is a critical level for the fund.
  • The ETF has gained 10 percent this year after falling nearly 22 percent last year.
Biotech’s moment of truth

One popular biotech-tracking exchange-traded fund has gained 10 percent this year, and Piper Jaffray technical analyst Craig Johnson is calling attention to a critical level near where it's trading.

Should the IBB break above that level, the fund could see substantial gains, Johnson said.

"This is now the fifth time we have seen the IBB stall out at this $300 level," Johnson said Tuesday on CNBC's "Trading Nation."

"You can see that every little pullback tends to be a higher low than we've had before. So I think on this pullback that we're getting right now, this is a very important support level right back to that uptrend support line. I suspect it's probably going to hold," he said, examining a chart of the IBB.

Other long-term indicators he tracks are also suggesting that this 18-month correction in which biotech has been stuck is "unwinding at this point in time," he added.

"So I suspect on this next move up, we finally break through that $300 level, and I suspect that the upside target, at least measuring it from the chart perspective, gets us to about $360," he said. Such a move would imply nearly 23 percent of gains from current levels.

"We like the IBB here, and we like biotech names specifically," he said.

The iShares Nadsaq Biotechnology Index fared quite poorly in 2016, dropping nearly 22 percent over the course of the year due in part to uncertainty surrounding drug pricing. At current levels, biotech may be worth a buy, said Jacob Weinig, founding partner and portfolio manager at Malachite Capital.

"We've seen a lot of people in the market betting for this to break through $300, and the chart certainly looks promising," Weinig said Tuesday on "Trading Nation."

"Over the last couple of years, we've seen a steady decline in volatility levels on the IBB. In fact, three-month at-the-money volatility option prices, if you would, are at multiyear lows," Weinig said.

One way in which he has observed traders playing the market is executing a "risk reversal," or buying upside calls by selling downside puts. In plain English, it's one way to get long a stock or, in this case, ETF. And while this is a "risky" way to play biotech, Weinig said, he may otherwise recommend buying call options outright or buying call spreads to limit the cost.

The biggest components in the ETF are Celgene, Gilead and Amgen. Shares of Gilead fell last week after the company reported lower-than-expected profits.