Breaking Bio: Drug Makers Cooking Off March Lows (Video)

Summary

• XBI soared nearly 58% off its March low.
• Amgen climbed 38% off March low almost back to an ATH.
• AbbVie also up ~37%, but a long way from the highs hit in 2018.
• In the video, we discuss larger context for these moves and probable patterns going forward for the largest components of XBI.
• Looking for more stock ideas like this one? Get them exclusively at Stock Waves. Get started today »

Many of the companies included in this article are in the mix developing treatments for COVID-19, some already have possible therapies in place. But perhaps the thing they have in common the most is how their price charts are governed largely by investor sentiment. Most of these names sold off right along with the market into March lows, but the rebounds for some have been far more impressive. In the following video, Garrett & I look at the popular SPDR S&P Biotech ETF (XBI) along with the components beginning with the largest market caps*. Our goal as always is to get a better understanding of the sector viz sentiment from the sum of its parts.

XBI has, basically, gone from Chemistry teacher to Kingpin in no time, hurtling 58.5% off the March 18th low (a few sessions ahead of the S&P) into the April 28th high like a pizza onto the roof. Whether counted as a larger degree fourth or an Intermediate degree (2) in a move off the 2016 low, XBI has a very clear "flat" corrective pattern from the July 2018 high into the March low.

Since the initial move off March was clearly only a 3-wave "abc" move that makes a Leading Diagonal the most likely option for a bullish pattern. It is nearing the typical resistance region for the 3rd wave and should hold support in the 80s as a 4th. The fourth wave of a diagonal can come deeper than that of an impulsive move, but with the 200-day MA around 86, that region would be ideal. A fifth wave should then target the 105-110 region to complete the first wave at the start of a longer-term rally. Support for the larger wave-2 retrace would be back again to the 80s.

From that larger wave-2 in the 80s later this year, we can expect a long-term rally to carry XBI toward 170 and then 200.

As we dive into the larger market-cap components, it is important to note that XBI while not "equal weight" has a LOT of components and the most heavily weighted at the moment is only 3.5%. That is Moderna (MRNA) which we discuss later in the video. After that, the next ~24 holdings float between 1.5% and 2.5% each. Though there might not be much variance in the proportionality of components, there is a significant difference in their size. So, the first part of the video we are sharing with you focuses on those larger ones beginning with Amgen (AMGN).

AMGN as well as Gilead (NASDAQ:GILD) and Vertex (VRTX) do not seem to support a bullish case for the biotech sector. These range from "toppy" looking for AMGN and VRTX which while possible they get dragged into further extension higher off the March lows have a less reliable upside. To downright bearish for GILD which is trying to complete the Primary B-wave bounce inside a larger Cycle IV degree correction.

Of the twelve biotechs discussed in our video, seven of them look to have solid upside potential in support of the bullish structure identified for XBI. AbbVie (NYSE:ABBV) not only held the 2019 low into March but also has one of the stronger moves off the March low so far. It counts best as starting the fifth wave of a larger diagonal, and in a diagonal, all sub-waves follow an "ABC" path, thus it is still within just the "(A.)" wave of that 5th. The initial move off March will be due for a consolidation soon with support in the 70s setting up a nice swing toward 100-120.

Regeneron Pharma (REGN) is another name with a strong setup for a substantial amount of longer-term upside. Like ABBV, it held a prior low from 2019 in March, that low was also a Primary wave-4 bottom. The rest of the Primary wave-5 easily takes RGEN up beyond 1200, but while we are still working on just wave (1) off the low, we will need a consolidation as a wave (2). The internal structure for that wave (1) allows for both an impulse and a diagonal and can even count as ABC up implying the entire P.5 could be an Ending Diagonal. This is one we continue to track very carefully in StockWaves, an ideal long-term entry might need to develop more, but the magnitude of the moves is great for trading.

Biogen (BIIB), on one hand, can look a lot like GILD as a potential wider flat for a deeper Primary wave-4, but if it can pivot over the resistance in the 350-region allows for a more immediate bullish alternative. The green (3) of Primary wave-5 targets the mid 500s and the rest of P.5 of the Cycle III should head toward 700s.

Alexion Pharma (ALXN) would, normally, have held resistance in the lower 90s and attempted at least one more low in a larger corrective pattern that started back in 2015, but the reversal off the March low might have cut that short. MRNA is up >320% from the 2019 low it made, that might be one of the reasons the smaller $16.8B company has such an outsized weighting in XBI. Although the structure is messier than ideal, the March low can count as a wave-2 bottom, and as long as support holds in the low 40s, MRNA targets 60s and then 85-100+.

BioMarin Pharma (BMRN) shares a lot of chart similarity to that of ABBV. Ideally, the 2019 low completed a muted end to a large degree fourth in a larger diagonal structure. Again, like ABBV, the March low held support above that and it is still early on inside the A-wave of the larger fifth. Ideally, the 70s hold as support while more of this pattern develops off the recent lows.

Last, we come to Alnylam Pharmaceuticals (ALNY). The larger structure of 2004 has some ambiguity, but since the 2016 low, the sub-wave structure is much cleaner and has a strong bullish stance. We can count five waves up and three waves down to a perfect 61.8% retrace at the Dec. 2018 low. Off of that, we can count a very aesthetically pleasing Leading Diagonal that should be nearly complete with the Vth. This "LD" is perfectly proportionate to be the wave-1 of a wave (3) off the 2018 low, and after an abc consolidation as a wave-2 toward the 90s would be a very high probability setup for a long entry. It is important to also note the clear resistance in this 150 region and a strong pivot over that could be a more immediate breakout easily targeting 200++.

*We continued the discussion further looking at many more of the smaller XBI components in the video posted last Thursday in our Marketplace Service: Stock Waves.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.