Look at the Biotech Index (IBB). Kinda scary, huh?
Discussed in this article: iShares Trust Nasdaq Biotech Index Fund- Shs Nasdaq Biotechnology Index Fund ( $IBB )
I want to look at the Biotech Index, the IBB ( NASDAQ:IBB ). This thing really took it on the chin; this has been an out performer for so long. We’ve got these key buy points, it seems like every time the thing hit the 50-day moving average it was a time to buy. We even saw that, I think Friday of the prior week. If, in the past, you do this typical deal, buy near support, keep a tight stop, buy near support, keep a tight stop, buy near support, once it’s established here. You don’t just buy because the stock hit the 50-day moving average. No, if only trading were that easy, we’d all be millionaires. You wait for signs of support; you wait for the sign that somebody else is jumping out of their foxhole first. You say, “Dude, I’m behind you all the way, go.” When you’re the first one out, you tend to get the Medal of Honor posthumously, so you don’t want to be doing that.
Every time the stock would pull back, and then bounce, was a great buying opportunity. What you do with it after that is not the subject of this video. But, if that had happened here, then you keep a tight stop and you’re out. By the way, if you haven’t sold, you did this, look, we’ll say it’s down 5 percent; it’s not like the stock, or here the ETF, it’s not like it just got crushed here, and now we’re saying, “Oh golly gee, if I’d only used my stops.” I’m just talking about in general principle, as far as trading, that you want to use protective stops. They’re easier to use, and more profitable to use, listen to me because I’m giving you pearls here, they’re easier to use and more profitable to use when you buy right; when you buy right at established support. The reason being because you have a better idea of where the stock needs to go in order for you to declare, oops, I’m wrong.
So if you’re buying at the 50-day moving average like you did here, okay, the stop didn’t get hit, the stop didn’t get hit. If you waited, maybe you bought here, oops, the stop got hit, maybe you’ve bought here, stop got here, whatever, but you get my point. Even if that was the case, by the way, you take a small loss. If you can’t take small losses then you should not be trading, if you can take big losses, then you should not be trading either, so you want to embrace the small losses. So look, if you had bought the stock here, trades down, you’re out, even if you’re in.
My suggestion, get out. Look at the volume here, this was massive volume and it had to do with a lot of different things: first of all look at the move here, so I think traders are going to be skittish anyway; you know all good things do come to an end. But here, you’ve got to stay away from this, Congress is opening some investigation on Gilead ( NASDAQ:GILD ), some House probe on the pricing of Sovaldi, this hepatitis-C drug that they have, which apparently is really effective. Really the question is, isn’t this drug, even though it’s priced at eighty-bazillion dollars, isn’t it still more cost effective than getting a new liver? That’s not the issue here, I’m all for drug companies lowering their drugs to make them more affordable, I like that idea; but here the market doesn’t, because it looks beyond Gilead ( NASDAQ:GILD ) and looks at all these other expensive drugs put out by other companies.
By the way, it’s not a policy discussion, it’s just a fact, a lot of the research and development that that companies do is totally crappy, I mean their drugs don’t amount to anything, so they put all this money into research and it doesn’t yield any benefits, so they’ve got to make their money somewhere. Again, that’s not in defense of a drug, I think this is like $200,000, or something like that; it might be $800,000, I don’t know; it’s not in a defense of that, it’s just saying with respect to these biotech companies, just keep in mind they aren’t hitting grand slams. With that said, I think these are going to be under further distribution.
The bottom line is this, when you see this kind of volume on a break of key support, not only just this last low, but also the 50-day moving average, which has held several times, this is something that you want to stay away from. So the bottom line is this, the glory days of biotech are over, get creative and find something else. This group could rest for weeks or months, I think this trade is over; the risk is high, if you’re going to be buying these stocks now, because again, I think the trade is over. Now, does that mean that I’m saying you need to be shorting these stocks? No, that’s an individual choice each person makes and it’s very, very chart specific. What I’m saying is, I know there’s a lot of “biotechians” out there, there better be because you made a boatload of money on buying and holding biotech. But at some point, you know, the last keg of beer is tapped and it’s time to leave the party; I think it’s time to leave the party.