After the best first quarter of a year after quite some time, the rally from the low keeps on going. In March I was advising to get cautious if the market decides to start turning lower. Some might have taken that as too cautionary, however I must remind you we’re still in a cyclical correction and approaching upper trading range. To me playing defense is more important than playing offense. Don’t forget, in October last year we got out of longs and how important that was for preserving our emotional health and keeping an open mind in Q1 this year.

A good thing to see is that under the surface some nice bases are being built. This could provide the necessary fuel to extend this rally towards previous all time highs and later even beyond. This has been my thesis since beginning of the year (see Is it over?). One of the nicest bases being built is in biotech stocks. After a magnificent run between 2011 and 2015 when they more than quadrupled, they’ve been consolidating ever since.

Let me start with a weekly chart of Biotech sector ETF (ticker $XBI).

It’s been consolidating below $93, a historical major level of interest, for 5 weeks now. If my bullish thesis about stocks is correct, I think it’s just a matter of time when XBI will break out above $93 to test all time highs, that just above $100, and then rally higher.

Let me present two individual stock ideas that are components of XBI and that could potentially provide nice returns.

The first one is Arrowhead Pharma $ARWR. The underlying fundamentals are gradually improving and the chart looks very constructive. I tweeted about it yesterday.

Very similar conclusions are for the next company, Vertex Pharmas $VRTX. This one also has improving fundamentals and the charts looks very attractive too!

The theme for every bull market is sector rotation. For the market to remain healthy we’ll need to see help from all sectors, including biotech. Remember, XBI wasn’t participating much in 2017 bull run. That could change in 2019/20. However we need to see a successful breakout above $93 first.

ChartingTrades.com is a blog of CT Capital Ltd.

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