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Biotech stocks are doing something that could result in a double-digit rally, trader says

Traders debate whether biotech is a buy after bounce
Traders debate whether biotech is a buy after bounce

Biotechnology stocks could be headed for an even bigger bounce.

The iShares Biotechnology ETF (IBB) edged lower Friday after catching some momentary reprieve in Thursday's trading session as the recent sell-off in speculative trades slowed.

There's likely more upside in store, at least according to the ETF's technical layout, Miller Tabak's Matt Maley told CNBC's "Trading Nation" on Thursday.

"When you see big downdrafts like we've just seen, that's an opportunity where you can add to those positions," the firm's chief market strategist said.

The IBB's relative strength index, a key momentum gauge, recently hit its most oversold level since 2018, which has only happened a handful of times in the last several years, Maley said.

"Each time, that's resulted in a huge bounce in the group, anywhere from 18%-40%," Maley said. "I think this is a great entry point. Even if you're just a short-term trader, this is something that should allow you to get a nice rally into the end of the year."

A similar momentum buildup is happening in shares of Moderna, which have lost nearly 30% in value over the last two weeks amid Merck's antiviral Covid pill news and the broader growth sell-off, Maley said.

"Its RSI chart is down to a level that it's only been down three other times in the last year," he said.

"All three of those times, the thing has rallied anywhere from 28%-60% over the next several months," Maley said. "I think this is a great entry point for long-term investors and even short-term ones who like to be a little bit more on the active trading side of things."

Not only has the IBB outperformed the S&P 500 since its inception in 2001 — up more than 361% versus the S&P's roughly 226% gain — but it could continue to do so, BK Asset Management's Boris Schlossberg said in the same interview.

"Life sciences just generally as a sector is going to be one of the key sectors of the 21st century," said Schlossberg, who is managing director of FX strategy at his firm.

"This is one of those types of sectors that you simply cannot ignore. It's going to be a core holding for any investor," he said. "Whatever sell-offs we have, whatever dips we have in this sector are very much temporary. You've got to just buy the dip here all the way through."

Investors who want to pick their spots could sell puts at the $140 level — IBB was trading around $155 on Friday — until those limits are hit, but should still look to the long term, Schlossberg said.

"The very promise of mRNA technology suggests that we could have some massive breakthroughs in life sciences going forward and that's going to make this whole sector, I think, one of the hottest sectors that we're going to see," he said. "I think in many ways life science is going to be more important than information technology into the greater half of the 21st century."