Every new bull market has leaders. A leader is a sector that’s performing the best, and within it are usually one, two, or several industries that are leading that sector. Within those industries are the stocks advancing the most pushing up the industry, the sector, and helping to drag up the stock market indices as a whole.
As stock markets bottom, leaders often emerge early. They are the industries and stocks that stop dropping first. They rally while the rest of the market is still dropping. There’s so much demand for these stocks that the pessimism of the day (the bear market) doesn’t seem to affect them.
I don’t know if the current bear market in the major US stock indices is over, but I do know it will be over someday. I’m awaiting the bottoming signals that will confirm the bottom is in. That hasn’t happened quite yet.
What I do know is that right now there’s a clear leader in the stock market: biotech.
The SPDR S&P Biotech ETF (XBI) is up about 29% in the last month.
According to Finviz, the biotech industry is the top performing sector over the last month. At a time when the S&P 500 and Nasdaq 100 have been holding just above their lows.
Could biotech be the next market leader in the next bull market?
- Watch for continued strength in this ETF and in biotechnology.
- Watch for the major indices and other sectors to start turning higher. Stock market bottoms require lots of stocks to start turning higher, not just one sector or industry.
Scan for emerging patterns in individual stocks in the biotech space. These could be potential trade candidates.
Scanning through one strong industry group is often more efficient than scanning through a bunch of stocks from industry groups that aren’t moving or still dropping.
Breaking Down the Biotech Chart
Biotech has been beaten down. I don’t like things that are beaten down. BUT, I do like things that rally a lot.
This recent rally is the biggest in the entire decline. That’s often a good sign.
If this sounds familar, it’s because it also works for uptrending stocks. If a stock falls much more than it did the prior advance, that’s usually a sign the stock is in for a sideways period or a further decline.
When we have a downtrend, a big advance signals that the decline has shifted into sideways or bullish movement.
Here the zigzag indicator shows all the price moves greater than 25%. Not once did the price rally more than 25% during that whole decline. Recently it rallied as much as 37%. That’s a nice shift in sentiment.
It doesn’t mean I’m jumping in to buy this ETF, but if it breaks out of this current consolidation to the upside, that would be nice. If there are individual biotech stocks that are moving sideways and break higher, that would be nice.
I always use stop losses to keep risk small in the event the price moves up but then fails to go anywhere or drops.
Cory Mitchell, CMT
My entire method of swing trading stocks is covered in the Complete Method Stock Swing Trading Course.
This is a great time to learn, before the next bull rally starts. Learn the patterns now to take advantage when the next opportunities arise.