Biogen Inc: BIIB Stock is Setting up to Break Out Higher as the Sector Turns Bullish
BIIB Stock: More Than Just Buyout Speculation
Biogen Inc (NASDAQ:BIIB) stock originally popped after rumours hit the mill that a buyout was in the making. Even though the news that followed trumped that idea as Allergan, Inc. denied those rumours, BIIB stock still managed to hold the gains. I originally stood by the notion that the trend higher was not just about the buyout rumour. The rumour only acted as a catalyst to reverse a predominant trend in the sector.
The NASDAQ biotechnology exchange-traded fund (ETF) is now moving higher as a result, and the implications are larger than just Biogen stock moving higher. The event marked the beginning of a rising tide. A rising tide tends to lift all boats. Being on the right side of a trend is one of the single most important aspects in producing profits aside from managing risk. Catching a trend as it reverses from bearish to bullish presents an investor an opportunity to cash in on larger than average gains.
The following chart illustrates the price patterns that set up a bottom in BIIB stock.
Chart courtesy of StockCharts.com
In June 2016, BIIB stock gapped lower and shares proceeded to sell off, creating a new 52-week low. The price action was very bearish as the prominent trend was lower. The pattern circled in pink changed that whole dynamic.
The pattern highlighted in pink is an island reversal pattern. This pattern is a reversal pattern that consists of two gaps, an exhaustion gap and breakaway gap, that occur around same price point. An island created by this price action is apparent on the chart as the trading action is isolated. This pattern is significant because all the short sellers who initiated positions after the initial gap down are trapped, holding their bearish positions.
These short positions in Biogen stock need to be covered at some point. Losses amounting from shorting a stock are unlimited, as there is no limit to how high a stock can trade.
The continuation gap appears as BIIB stock breaks through resistance. This level is where the exhaustion gap initiated the island reversal and completes the entire trend reversal pattern. Such patterns have been known to mark exact bottoms.
BIIB stock was not the only biotech stock that was bottoming in July; the entire sector also put in a bottom in July.
The following chart illustrates the biotechnology ETF and is the proxy for the sector.
Chart courtesy of StockCharts.com
There are two pieces of bullish news garnered from the above chart.
First, the moving averages are converging and will be producing a golden cross in the coming days. A golden cross is a bullish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. Traders use this signal to confirm that a bull market is on the horizon. It is wise to trade in the direction of this signal. A trader’s position should either be long or neutral.
Second, IBB stock broke above its 200-day moving average and has continued to trade above it. The 200-day moving average is the dividing line between stocks trading in a bull market and stocks trading in a bear market. When the share price is above the moving average, it is bullish; when share price is below the moving average, it is bearish.
These two bullish signals reaffirm the bullish bias behind Biogen stock as the entire sector is now moving higher.
The following chart illustrates the short-term bullish price action on Biogen stock on a one-hour chart.
Chart courtesy of StockCharts.com
The trading action off the July lows is very bullish. An impulse wave highlighted in green is followed by a consolidation wave highlighted in purple. A resolution of the consolidation wave could see a move higher of equal length and duration of the initial impulse wave. One could argue a possible price target of $400.00 for Biogen stock if the consolidation wave resolved higher at this moment.
This type of price action is very bullish and is alluding toward a bullish trend. Bullish trends are littered with impulse waves that are followed by consolidation waves, which then give way to further Impulse waves.
The Bottom Line on Biogen Stock
Biogen stock is looking to move higher as the whole sector is catching a bullish tailwind. The news regarding the buyout from Allergen only ignited the current bullish implications that were already in the making. I am bullish on BIIB stock and the entire biotech sector. Biotech stocks are an attractive space for those looking for share appreciation and growth, but caution is warranted, as this sector contains many inherent risks.
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