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The biotech sector has had a rough go of it since last July. The SPDR S&P Biotech ETF (NYSEArca: XBI) lost over half of its value from last July’s high to the February low, falling from $90.75 to $44.11. The XBI biotech ETF has rallied approximately 30% off that low, but the rally has stalled in the last few weeks.
Looking at the daily chart, we see that the fund is stalling just below two different layers of resistance. First, we see flat-line resistance at the $58.96 level, which was the temporary low back in September. A second layer of resistance comes from a downward-sloped trend line that connects the high from last July with the high in December. That trend line is resting just above the $60 mark at this point.
Looking at the daily oscillators for the biotech ETF, we see that the daily stochastic readings just made a bearish crossover out of overbought territory and in most instances over the past year that has been a bad sign for the fund.
Turning our attention to the weekly chart for the biotech ETF, we get a better look at the trend line in the daily chart and we see the flat-line resistance as well. The most astonishing thing about the weekly chart is the steepness of the trend line. It is rare to see such a steep downtrend, but especially on an ETF.
The weekly oscillators are also providing information that make me think the XBI heads lower in the coming weeks. The 10-week RSI is just above 50 at this time and over the last seven months each time the RSI got above 50 the XBI turned lower from there. The weekly stochastic readings are the highest they have been since last August and they are climbing.
The XBI is a well-diversified fund with 90 holdings and none of the holdings represent more than 2.7% of the fund’s value. This makes it a little more difficult to gauge the sentiment toward the holdings, so instead I looked at the sentiment toward the XBI itself. The short interest ratio is at 4.2 and has been falling recently.
The put/call ratio on the XBI is currently at 1.52 and it has also been trending down since the beginning of the year. The put/call ratio was as high as 2.97 back in January. The fact that both the short interest ratio and the put/call ratio are trending lower is an indication that the sentiment toward the biotech ETF has turned more bullish in recent months.
With the layers of resistance and the downtrend the XBI biotech ETF has been in, I look for the fund to fall in the next few months. I can see it dropping back down below the $45 level by the end of the second quarter. Should the fund move above the $60 level, I would shut down the bearish position.
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