Potential Biotech Breakout In Play

The landscape seems to be changing within the Biotech sphere. Over the course of the last 6 months we have seen numerous US politicians come out against price gouging activities within the sector, with many taking a general stance that pricing is perhaps too high. Certainly Hillary Clinton was vocal on the matter (Bernie Sanders still is), and while we have heard rumblings from President Trump’s administration we have heard nothing concrete in terms of a plan to tackle the issue. Until recently that is. 

His plan is to slip new legislature on drug pricing into his replacement policy for Obamacare, and since we are all now keenly aware that repealing and replacing that legislation is going to be a difficult task to complete, we would appear to have a grace period ahead of us in terms of Biotech and the pharma industry in general. The legislative changes are mostly centred around the bidding process when negotiating drug prices, and a push for greater competition within the industry to help keep prices down, so while we do have potential change on the horizon we should still see the best companies perform well and crucially we now know that we won’t have price caps set in place by regulators that would obviously impact these companies’ bottom line. 

Since forming a top in the summer of 2015 along with all other indices, the biotech index (IBB) has been slow to recover the loses. While the other major US bourses (SPX, COMP, RUT) have gone on to make new all time highs, the Biotechs have languished near their lows. This then represents a good opportunity as if/when we get a firm decision on the kind of changes President Trump plans to make, and they are as discussed above; and/or we find that he struggles to get his legislation into power in a timely fashion, it is feasible that IBB may start to catch up to the others. 

In terms of our own model, we look at trader positioning data as our biggest input and we create on oscillator with oversold and overbought ranges using average volume and open interest data. You can learn more about thatlearn more about that and use this system for yourself, learn more about that. Our monthly signal for IBB flipped bullish in January 2017 indicating that the bigger picture trend was becoming more positive, and while the weekly timeframe hit overbought and turned down in the middle of March 2017, it is now showing signs of a turn higher again.