This week’s analysis will stick with the multiple timeframe approach. Today we are featuring a biotech stock with a channel breakout on the weekly chart and a classic retracement on the daily chart. Moreover, a larger bullish reversal pattern could be forming on the daily chart.
In part 1, the weekly chart below shows Biogen (BIIB) in a long-term downtrend, but showing early signs of a bullish reversal. Note that BIIB is part of the Healthcare SPDR (XLV) and the Biotech ETF (IBB), both of which are leading the market since late October. On the price chart, BIIB surged in September 2022 and broke resistance. The stock continued higher into July 2023 and then fell into October 2023. This decline formed a falling channel (blue trendlines) and returned to the breakout zone (green shading). Notice that BIIB held above the 2022 lows (green dashed line) and broke the upper line of this channel with the advance in late 2023. This is promising price action.
The indicator window shows the percentage difference between the close and the 40-week SMA. Note that this indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP. There are signal thresholds at +5% and -5% to reduce whipsaws. An uptrend signaled with the breakout in September 2022 as the indicator exceeded +5% (green arrow). The uptrend remained until the indicator moved below -5% in July 2023 (red arrow). A move above +5% would turn it bullish again. Even though this trend-following indicator has yet to trigger, I am also seeing promising price action on the daily chart. The stock is trading in a potential reversal zone on the daily chart and a classic bullish reversal pattern could be taking shape.
In part 2, the daily chart show Biogen hitting a reversal zone and a classic bullish reversal pattern could be forming. First, BIIB hit resistance in early January and fell below 250 in mid January. This decline retraced 50-61.8%. It is fairly normal for a correction to retrace around half of the prior move. Think two steps forward and one step backward. This retracement zone also coincides with the gap on December 11th. A gap up represents strong buying pressure and it is important that this gap holds. Biogen firmed in this zone and turned up on Thursday and Friday.
The indicator window shows RSI(14) hitting 30 in June and dipping below 30 several times from July to November (red shading). Dips below 30 show strong downside momentum that is more typical of downtrends. RSI surged above 70 in December and tagged 70 again in early January. Overbought readings reflect strong upswing momentum that is likely to occur in uptrends. This looks like a regime switch for RSI.
What about the classic reversal pattern? The red line on the price chart marks neckline resistance of a potential inverse head-and-shoulders pattern. A breakout at 270 would confirm this pattern. Personally, I would rather attempt to time a reversal of the January decline and improve the risk-to-reward ratio. This is what I call trading the swing (January decline) within the bigger pattern (H&S Reversal). BIIB forged a bullish engulfing on Thursday (blue shading) and confirmed with a 1.21% gain on Friday. This is the early sign that the short-term downtrend is reversing. A close below last week’s low would argue for a re-evaluation.