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 that, and use this system for yourself, here. 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. 

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For fans of technical chart patterns, you may like to note that we had a bearish head and shoulders pattern in play which had formed from that March high. The ‘neckline’ of that pattern came in at 286 or thereabouts, and while we tested it a number of times in April, we were never able to close below it. Often when a price pattern fails to trigger we see a strong move in the opposite direction, so we have been watching this chart looking for a significant move away from the 286 level and hoping to see a close back above 292 to indicate it had failed. 

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This was achieved yesterday and at the same time we also confirmed a buy signal on our IBB daily timeframe (chart attached below), so we at once scaled down into our lower timeframes (we have on our site realtime charts for a number of commodities, currencies and indices on timeframes from 5 minutes up to monthly) and promptly took a long position on the next minor timeframe buy signal. In terms of other technical indications, you'll note that MACD gave us a bullish cross yesterday for the first time since turning lower in March, and other standard indicators show that the 'technicals' aspect of the chart is improving rapidly. 

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The risk is well defined on this trade as we have the neckline to trade against, and in terms of the reward we have the initial target as a retest of the recent highs in the 308-310 range, but the primary target would be a retest of the prior highs formed in December 2015 (327-340). And who knows - perhaps the Biotechs make new highs along with their cousin indices over the next year or so? I certainly would not rule it out.