ETF Trends
ETF Trends

Biotechnology stocks and exchange traded funds are struggling to start 2016 with some well-known biotech ETFs residing near 52-week lows and well off the highs set in mid-2015. However, the group’s recent struggles could be giving way to buying opportunities.

The SPDR S&P Biotech ETF (NYSEArca: XBI), which tracks an equal-weight index of biotechnology companies and focuses on smaller biotech names, has been among the more beaten up biotech exchange traded funds, but some technicians believe the charts on XBI indicate upside for the ETF could be ahead.

Although XBI is an equal-weight ETF, there have been occasions when FDA and mergers and acquisitions news from just one of the ETF’s holdings has led to significant intraday pops for XBI. [Intercept Lifts ETF]

“If XBI is heading downward in a major impulsive (i)-(ii)-(iii)-(iv)-(v) move from its July 2015 high, as the internal structures of the swings indicate, then we would expect to see a fourth-wave correction appear soon. There are several areas to watch for support to develop, and that suggests that a useful strategy for seeking a long trade might be to scale into a position in small increments – either buying at the levels or (more safely) buying small pullbacks that create higher lows after a support level has been tested,” according to See It Market.

Biotechnology ETFs should also prove immune to hawkish changes in Fed policy. A recent study by Deutsche Bank indicates major biotech indexes have negative correlations to changes in 20-year U.S. government bonds.

Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.

Additionally, the actuaries calculated that around 8.4 million Americans became insured in 2014 and noted their increased use of medical services. The number of people on Medicaid is projected to increase to 78.1 million by 2024, outstripping Medicare, which is expected to have 70.3 million enrolled. [Healthcare ETFs: Specialized Drugs in Greater Demand]

“If our main scenario is correct, with the Biotech Sector ETF in the process of making a large five-wave move downward, then a fourth-wave correction should not exceed the August low, which represented wave (i) of the five-wave sequence. On the other hand, if price exceeds that level of 59.86 on a bounce, it would imply that a larger upward pattern might be forming,” according to See It Market.

SPDR S&P Biotech ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.