A Gutsy Technical Call on a Biotech ETF

On Wednesday, the technical outlook for the iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB) was highlighted and the prognosis can easily be summed up: IBB was still honoring its multi-year uptrend, but it and the other biotech ETFs are in precarious technical positions.

IBB, the largest biotech ETF, is lower by 9.1% over the past five sessions and the “bogey” on this trade is $230. Meaning if the ETF fails to honor support there, already eager shorts will pile on some more or scurry over to the suddenly popular ProShares Ultrashort Nasdaq Biotechnology (NasdaqGM: BIS), the double-leveraged inverse answer to IBB. [Biotech ETF Clings to Uptrend]

IBB did not do itself any favors Wednesday with a loss of $4.35, or 1.82%, to close at $235.09. However, some technical analysts see opportunity in the downtrodden IBB, saying the ETF is due for a bullish reversal.

Since 2011, IBB has “has exhibited a clear trend higher, bounded on the upside by the upper Bollinger band and to the downside by the 20 week Simple Moving Average (SMA). With the recent pullback reaching that 20 week SMA today it is now ripe for a reversal trade higher. Don’t you want to feel good and get rich from this reversal trade?,” notes Greg Harmon of Dragonfly Capital.

Harmon points out that this particular setup is not for the faint of heart, noting that those not willing to incur a loss on IBB below Monday’s low at $232.84 should look elsewhere.

For now, IBB is 7.5% below its 50-day moving average and 9.1% above its 200-day line, but still in the midst of one of its steepest declines in some time. IBB ranked among the 10 best non-leveraged sector ETFs in three consecutive years ending 2013. [Momentum ETFs Hit Hard]

In a sign of just how bearish some traders have gotten on the biotech group, BIS has taken almost $15.2 million since the start of March. That may not sound like much, but that number is twice the ETF’s assets under management total at the end of last year. [Inverse Biotech ETF Grows Up]