It's time to keep an eye on biotech

Key points

• The iShares Biotechnology ETF (ticker IBB) just bounced off of an oversold level and moved back above its 200-day moving average
• IBB is also entering its most favorable seasonal period of the year
• This combination of factors does not guarantee a rally in the biotech sector; However, it does strongly suggest that traders be looking for an opportunity to play the long side in the months ahead

Biotech bounces, regains uptrend...for now

The chart below shows that IBB declined almost -12% in less than two months but has since rebounded strongly and crossed above its 200-day moving average. While we do not consider moving averages to be "predictive," they are helpful in objectively identifying the trend "right now." So technically, IBB is (for the moment) in an "uptrend."

Further confirmation of an uptrend (for those looking for more) would occur if IBB can breakout above the top of the red box drawn in the chart below.

Biotech is entering a favorable seasonal period

As always, seasonality is "climate, not weather." That said, note that ticker IBB is entering its most favorable seasonal period of the year, as shown in the chart below. 

This favorable period extends from the close of Trading Day of the Year (TDY) #87 through TDY #144. For 2024, it extends from the close of 2024-05-06 through 2024-07-29. 

Historical performance during this favorable seasonal window

Ticker IBB started trading in 2001. The chart below displays the hypothetical growth of $1 invested in IBB only during the TDY #87 through TDY #144 period every year since then.

The table below summarizes IBB's performance during this period.

A Win Rate of 70% is good, but it also implies that this is not a sure thing. The most favorable signs are that the median gain is 3.6 times the median loss, and moves of 10% or more skew heavily to the positive side.

What the research tells us…

Remember that an annual seasonal trend chart (such as the one above) is an average of historical results and NOT a "roadmap" of what will happen in any particular year. The best use of seasonal trends (in this author's opinion) is to trade in the direction of the primary trend during those times when price and seasonality agree. A favorable configuration exists with IBB entering a favorable seasonal period and the share price (presently) above its 200-day average.

Jay's Trading Maxim #149: There are ALWAYS great potential opportunities. There are NEVER any guarantees.