Could a Move Higher in the S&P 500 Biotechnology Index Be Your Cup of Tea?

The S&P 500 Biotechnology Index may be ready to break out of a multi-year base in the form of a bullish cup-and-handle chart pattern. If this type of chart pattern executes, then based on historical data, the index price is likely to move higher over the long term.

Technical analysts describe a bullish cup and handle as a continuation-type pattern in which the price consolidates into what resembles a tea cup, followed by a breakout in the form of the cup’s handle. Once the pattern is complete, the price is likely to continue to move upward. To determine how much higher the price is likely to move following a breakout, you simply measure the price change from the bottom of the cup to the beginning of the handle, and add that value to the top of the handle. The final number is your bullish price objective.

The current pattern, which began in August 2015, took approximately two years to form its base, or cup. More recently, over the months of July and August 2017, the handle became more visible (Figure 1). Earlier this month, the index price has remained above the 4,000 level for more than three trading days, which increases the likelihood that the pattern executes to the upside, and the price continues higher over the next 3–12 months.

Looking at historical data going back to 1994, there were 19 instances when the S&P 500 Biotechnology Index executed a bullish cup-and-handle chart pattern, and both average and median returns over the subsequent 3- to 12-month periods were impressive (Figure 2).

 

The recent cup-and-handle pattern breakout on the index is providing an initial signal that the longer-term trend may be changing, which may result in the S&P 500 Biotechnology Index’s price to continue moving higher. Will this be the cup of tea investors have been long awaiting as a signal for a potential biotechnology-related trade? Well, considering that this multi-year base formation has just recently been triggered, it may be prudent to wait for further confirmation of a trend reversal prior to investing to help mitigate the possibility that this is a false signal. Stay tuned to the LPL Research blog for future analysis of S&P 500 industry groups.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Stock investing involves risk including loss of principal.

The S&P Biotechnology Select Industry Index is a modified equal weight index and typically consists of approximately 70 companies that represent the biotechnology sub-industry portion of the S&P Total Markets Index (S&P TMI). The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, Nasdaq National Market and Nasdaq Small Cap exchanges.

Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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