Biotech is hot, but it might be about to burn out, says top technician

Stocks are breaking out to new all-time highs yet again on Monday, but there could be one area of the market in danger of outrunning itself.

Biotech is on fire — there are no two ways about it. The IBB Nasdaq Biotech ETF is up nearly 30% since October, while its S&P counterpart, the XBI, has gained more than 20% during that time as a series of blockbuster mergers has pushed momentum in the space into overdrive.

But could these high flyers be headed back to earth? Carter Worth, Cornerstone Macro head of technical analysis,  thinks so.

“There was a well-defined trendline,” Worth said Friday on “Options Action.” “And what happens? You get a major move above that level. But where has it returned to? It has returned right to a prior high. And more often before exceeding a high, you have to contend with it.”

“We are stuck, essentially, right at that high. We've been grinding now for almost a week, and I think what you're going to get is a period of very low [volatility] after this big move,” said Worth.

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Like all periods of consolidation, the grind that the IBB is currently experiencing will have to resolve. Due to the nature of this monster move to the upside over the past two months, however, Worth is ruling out the possibility of more gains to come.

“You encounter supply. People from [the prior high] getting out, and people from [the current high] taking profits,” said Worth, “and you get stuck. So the betting here is that this is actually just that, stuck, and it's right to harvest some gains if one has done well.”

The IBB was trading about 1% higher in Monday's session.

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