What To Watch In The S&P Biotech ETF After Johnson & Johnson's $16.6B Abiomed Deal

As the exodus out of mega-cap technology stocks continues, investors and money managers are looking for other sectors to rotate into.

While value stocks have been grabbing the headlines as of late, Johnson & Johnson (NYSE: JNJ) may have jumpstarted the biotech sector with its purchase of Abiomed Inc. ABMD Monday. More important is the substantial premium the pharma giant paid for the company.

Investing in individual issues certainly can be rewarding if the company is either taken over or is able to bring new drugs to the market. And it can be very risky if the trials do not go according to plan.

In light of Johnson & Johnson’s surprise purchase of Abiomed, the PreMarket Prep crew discussed investing in a biotech ETF.

An Interesting Chart For Biotech ETF: If you're looking for exposure to a basket of smaller, more speculative biotech companies, that's what comprises the SPDR S&P Biotech ETF XBI.

Co-host Dennis Dick has some positive comments on the index’s potential.

“The chart looks interesting to me, it pulled back off its August high and has built another base to support a rally,” he said.

“If JNJ has started something here and people start getting interested in smaller biotech stocks and there is more deals, the index has room on the upside.”

Technical Take On XBI: When the ETF was being covered on the show, it was trading higher by over $1 at the $83.25 area. The author of this article alerted investors to the major resistance in the $84 area. In fact, the issue had three of its last four highs in the $83.88-$84.24 range.

XBI Price Action: After a higher opening price ($83 vs. $82.15), the issue had a brief dip to $82.71 and resumed its move higher. It was able to get into the lower $84 handle and then peaked at $84.13 before reversing course. It went on to make a new low for the session at $82.47.

The ETF ultimately gained 0.82% Tuesday, closing at $82.82. 

The discussion on the XBI and the overall outlook for the biotech industry from Tuesday’s show can be found here.

Photo via Shutterstock.