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5 Buy Signals From the Health Care Sector - views
BALTIMORE (Stockpickr) -- The health care sector is strong right now -- and that's creating some tradable opportunities for investors this summer.
You read it right: Health care is hot. As a sector, it's leading the pack in terms of relative strength, a measure of performance vs. the broad market. That's not just an interesting stat about the healthcare sector's performance in the past. Research shows that stocks with strong relative strength tend to outperform the market for the next three-to-ten months as well. That means that healthcare stocks are positioned to keep pushing higher for the rest of the year.
With relative strength names skirting the correction of the last few weeks, there's some extra evidence to buy into momentum sectors this summer. That's why we're taking a technical look atfive health care stocks throwing out buy signals this week.
For the unfamiliar, 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.
So without further ado, let's take a look at five technical setups worth trading now.
Up first is Agilent Technologies (A), a tech company that's evolved into one of the largest healthcare diagnostic device suppliers on the market. Agilent spent most of 2013 consolidating sideways in an ascending triangle pattern, but traders who missed the breakout above $45 resistance back in early May are getting a second chance at a low-risk entry in this stock.
The ascending triangle in Agilent was formed by a horizontal resistance level above shares at $45 and uptrending support to the downside. The breakout above $45 at the start of May was a buy signal for Agilent, but shares corrected alongside the broad market for the rest of the month. Now a throwback down to newfound support at $45 is giving traders a buying opportunity.
A throwback happens when a stock moves back down to test newfound support at its former breakout level -- in this case at $45. And while throwbacks look ominous, they're actually constructive for stock prices because they re-verify the stock's ability to catch a bid at support. For that reason, it's best to think of a throwback as a second chance at a low risk entry in Agilent.
While shares are slightly below $45 as I write, the move isn't material enough to count as a violation. Look for the first significant bounce off of support as a buy signal.
We're seeing the exact same setup in shares of HCA Holdings (HCA) right now. It's just less far along.
Like Agilent, HCA is currently forming an ascending triangle pattern, in this case with resistance at $41.50. That resistance level is the breakout signal for this Nashville-based hospital company. Since the breakout hasn't happened yet, traders have an opportunity to be earlier in this trade.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles and other price pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Onstead, it all comes down to supply and demand for shares.
That resistance line at $41.50 is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. But uptrending support indicates that buyers do have control of HCA at lower price levels. That's what makes the breakout above it so significant -- it indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
Pacira Pharmaceuticals (PCRX) is another healthcare stock that's got breakout potential this week. That's thanks to a bullish inverse head and shoulders pattern that's been forming in shares of the small-cap pharma name since early March.
The setup in PCRX may not be textbook, but it's tradable.
Pacira is currently forming an inverse head and shoulders pattern, a popular setup that indicates exhaustion among sellers. The pattern is formed by two swing lows that bottom out around the same level (the shoulders), separated by a bigger dip called the head; the sell signal comes on the move above the pattern's "neckline" level, right at $30. PCRX has made a few intraday moves above $30, so it's important to keep confirmation in mind here. I wouldn't consider the breakout complete unless a close above $30 is followed by an open above it the following session.
Momentum, a leading indicator of price, adds some extra confidence to this trade. 14-day RSI (at the top of the chart) broke its downtrend at the start of May, when PCRX started forming its head. Since then, it's been in an uptrend.
Watch for the breakout before jumping into this tiny name. You don't want to be early to the party.
West Pharmaceutical Services
The S&P 500 has been trading in an orderly uptrend since all the way back in November, so it shouldn't come as a surprise that plenty of individual names are following the index's lead. Mid-cap pharma packaging and delivery firm West Pharmaceutical Services (WST) is a perfect example. It's been in an uptrending channel that's mirrored the broad market since late last year.
You don't have to be an expert technical analyst to figure out what's going on in WST. A glimpse at the chart will do. When you're looking to buy a stock within a trend channel, buying after a bounce off of support is good strategy for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). That's exactly where West is right now.
The 50-day moving average has been a stellar proxy for support since the start of 2013. If you decide to jump in on WST here, that's where I'd suggest keeping a stop loss level.
Cigna (CI) has been another poster child for the S&P's orderly rally. Just like West, Cigna started on its own uptrend at the end of 2012, bouncing in between well-defined trendline support and resistance levels for the last seven months. Now, with shares of CI bouncing off of support this week, it makes sense to be a buyer.
From a percentage standpoint, Cigna's retracement during the last correction was pretty tepid. That's a good sign for buyers -- this stock has been rallying harder than the market during the up-legs and falling less than the broad market on the down-legs. This trendline bounce is pitting Cigna to a test of resistance just below $70. That mini-breakout should add some extra upside to this latest buying move.
As with West, the 50-day is the ideal place for a protective stop in Cigna.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji