Stock Quotes in this Article: COV, ETN, HMA, HS, HSC

BALTIMORE (Stockpickr) -- Health care stocks are looking pretty healthy for investors right now. As a group, the S&P 500 Healthcare Sector Index is showing significant relative strength over the rest of the S&P 500 Index in 2011, delivering 12.46% year-to-date returns, vs. just 5.3% from the whole S&P.

As that relative strength measure continues to climb with June approaching, it’s shouting “buy” to investors who are looking for a place to park their cash as June’s trading approaches.

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    More important, it’s creating some seriously worthwhile technical trading opportunities in a handful of health care stocks. Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

    Today, we’ll take a look at three health care stocks showing actionable technical setups right now -- and two stocks outside of the sector that should be on your trading radar. Here’s everything you need to know.

    HealthSpring


    $3 billion managed care organization HealthSpring (HS), one of TheStreet Ratings' top-rated health care provider stocks, has been a good example of a serious outperformer this year-to-date. Shares of the company have rallied more than 64% since the first trading day of January.

    But while that performance is stellar, it doesn’t necessarily mean that late-to-the-party traders have entirely missed the boat. Instead, there’s a low-risk entry brewing in this stock right now.

    HealthSpring’s upside price action may register a large percentage run, but it’s hardly been haphazard in 2011. It’s actually been bounded by an uptrending channel, dynamic levels of support and resistance that act like a sort of price floor and ceiling for shares as pricing continue to climb.

    That controlled ascent is crucial for traders right now. Because bounces off of support have historically offered the lowest-risk entry points for shares of HealthSpring, it’s clear that the ideal entry comes off of a bounce of support once again.

    And right now, shares are just confirming their bounce off of that uptrending support level. With downside support coinciding with the stock’s 50-day moving average, it makes sense to keep a protective stop just below that price level.

    HealthSpring, one of the top holdings of David Dreman with a 1.4 million-share position as of the most recently reported period, shows up on a recent list of 6 Stocks on Pace to Double This Year.

    Covidien

    A similar setup is exhibiting itself right now in shares of medical device and pharmaceutical maker Covidien (COV). The Dublin, Ireland-based firm has seen similar trading within its own channel in 2011, but its most recent bounce is still in the nascent stages.

    It’s crucial to remember that trend lines do eventually fail to act as support or resistance for shares of any stock -- that’s why waiting for a bounce before taking a trade is necessary. The bounce acts as confirmation that the support level (in this case) is going to hold up. While that confirmation may cost a few missed points on a trade, it’ll also significantly reduce your risk.

    Consider going long this stock on its next solid white bar.

    Two big bets on Covidien in the first quarter come from Karen Finerman's Metropolitan Capital Advisors -- the stock comprises 4.5% of the total portfolio -- and Donald Yacktman's Yacktman Asset Management, with a 1.4 million-share stake.

    Health Management Associates

    Mid-cap hospital operator Health Management Associates (HMA) is another health care name that’s showing a bullish technical setup right now. Shares of the firm are forming a bullish ascending triangle pattern, a setup that’s characterized by a horizontal resistance level to the upside and uptrending support below.

    Essentially, as shares of the stock get squeezed between these two price barriers, they get pushed closer and closer to that resistance level. As a result, the chances for a breakout above it become significantly stronger.

    Resistance levels act like price ceilings for shares of a stock because there is an excess of supply of shares at that level; put simply, sellers are willing to sell their shares for that price. As eager buyers absorb that supply, though, that price ceiling can weaken enough to spark a breakout.

    Not surprisingly, it’s essential to wait for the breakout to actually take place before buying shares of a stock that’s showing an ascending triangle. Until that overhead supply gets absorbed by buying, it’s not a high probability setup. In the case of HMA, consider a protective stop just below the 50-day moving average.

     

    Eaton

    Switching gears from the health care sector, let’s take a look at power management company Eaton (ETN), a stock that’s exhibiting a classic “if/then trade” setup right now. Unlike an ascending triangle, which has directional bias as the pattern forms, an if/then trade is a period of horizontal consolidation where the stock’s eventual move (and our trading direction) isn’t determined until a predefined move is made in shares.

    That contingent move comes when shares break above resistance or below support – essentially, buyers or sellers need to take a convicted position by shoving shares out of an “easy” price range. When that happens, the high-probability trade comes in the direction of that buyer or seller sentiment.

    In other words, if shares break above resistance, then buy; if shares fall below support, then sell.

    Eaton, one of the top-yielding industrial stocks, shows up on recent lists of Cramer's Stocks to Watch as Oil Prices Fall and 12 Stocks on Goldman's Sell Block.

    Harsco

    That exact same setup is taking place in shares of industrial services firm Harsco (HSC), one of the top-yielding metals and mining stocks. Like Eaton, Harsco has been trading in a sideways channel after making a large move higher.

    Most likely, both of these stocks will ultimately reconcile themselves in the direction of the broad market (which is also ranging sideways right now). A breakout in either direction in these and similar technical setups could tip off traders as to the market’s eventual direction.

    In the meantime, wait for Harsco to break outside of its channel before taking a trade on this stock. Whichever way it triggers, consider a protective stop just inside the channel to protect against unexpected price action.

    To see these plays in action, check out the Technical Setups for the Week portfolio on Stockpickr.

    -- Written by Jonas Elmerraji in Baltimore.

    RELATED LINKS:

    >>Does Technical Trading Actually Work?
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    >>7 Dividend Stocks Boosting Shareholder Returns

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    At the time of publication, author had no positions in stocks mentioned.

    Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.