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5 Health Care Stocks Ready to Break Out - views
BALTIMORE (Stockpickr) -- Health care stocks look healthy right now. As a sector, health care names have been showing off some stellar relative strength vs. the S&P 500 this year, and they’re continuing to plow higher in spite of Mr. Market taking a breather for the past month and change.
Now a handful of health care names look ready to pop again in April. Today, we’ll take a technical look at them.
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 biotechnology firm Amgen (AMGN). Shares of the $77 billion drugmaker have been on fire in 2013, rallying close to 22% since the calendar flipped over to January. And now, a very short-term trading pattern in Amgen points to more upside ahead.
Amgen staged a substantial rally in March on the heels of successful drug trial announcements, breaking out to new highs at the same time that the broad market was merely consolidating sideways. Now shares of Amgen are forming a pennant pattern, a very short-term consolidation that gives traders a chance to catch their breath in AMGN before figuring out their next moves. Pennants are often called “half mast patterns” because a breakout to the upside generally results in another move that’s equal to the first. That would spell considerable upside if AMGN pushes through the resistance level marked with the “R” in the chart.
Momentum adds some extra confirmation to the pennant setup right now. In spite of AMGN taking a breather, 14-day RSI remains in a solid uptrend right now. Since momentum is a leading indicator of price, the fact that RSI is holding its uptrend bodes well for investors here. If you decide to buy the move higher in Amgen, I’d recommend keeping a tight protective stop in place.
Another consolidation play is shaping up in shares of medical device maker Zimmer Holdings (ZMH) -- this one’s just much longer-term. Right now, Zimmer is forming a rectangle pattern, a setup that’s formed by horizontal resistance above shares and horizontal support below them. Like pennants, rectangles are common after a big move because they give investors a chance to catch their breath and figure out their next moves. Also like a pennant, the best way to trade this setup is by waiting for a breakout outside the rectangle, then placing a trade in the direction of the move.
A breakout above $76 resistance is a buy signal, while a break below $72 support signals a sell in ZMH.
Whenever you’re looking at any technical price pattern, it’s critical to think in terms of buyers and sellers. Pennants, rectangles and other 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. Instead, it all comes down to supply and demand for shares.
That resistance line at $76, for example, 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. That’s what makes the breakout above it so significant -- a breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level. That’s when you want to own shares.
You don’t have to be an expert technical analyst to see what’s going on in medical device and instrument firm Becton Dickinson (BDX). Becton is currently forming an uptrending channel, a trading range that’s bounded by a trendline resistance and trendline support level. Those support and resistance levels give us a high probability range for BDX to trade within. And as you might expect, the ideal time to be a buyer is on a bounce off of support.
When you’re looking to buy a stock within a trend channel, buying after a bounce off of support makes sense 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).
If you decide to buy here, I’d recommend keeping a stop at the 30-day moving average; while the 30-day isn’t a “default” moving average that many traders look at, it’s been a good proxy for support since the uptrend started.
We’re seeing the exact same setup taking place in shares of mid-cap drug maker Covance (CVD). Just like Becton, Covance has been trending in an uptrending channel since back in November, bouncing off of trend line support three times since then. Now shares are testing bounce number-four.
I mentioned earlier that the ideal time to buy an uptrending channel trade is on the bounce off of support, and Covance is a textbook example of a low-risk entry. Shares pushed right off of that uptrend line in yesterday’s session, and if we see continuation today it makes sense to be a buyer.
All of that said, contingency plans are important even in textbook trades. That’s why I’d recommend keeping a protective stop right at the 50-day moving average.
Not all of the names on our breakout list are bullish trades. We’re seeing a downside setup in health care and research instrument maker Mettler-Toledo (MTD) this week.
MTD’s stock chart isn’t a huge departure from some of the other health care names we’ve seen. Shares started an uptrend in November, and they’ve plowed more than 25% higher since then. But now a double-top pattern points to an end to the trend. The double top is a setup that’s formed by two swing highs that hit their heads at approximately the same price level. The sell signal comes on a breakdown below the near-term support level for shares, currently right at $205. If shares slip below that price, we’ve got a sell signal for Mettler-Toledo.
Momentum broke back in February, signaling an early warning that the uptrend was about to end -- and indeed the trend line broke with MTD’s second top in March. But the fact that there’s still some semblance of demand at $205 could spare this pattern from actually triggering. Traders should keep a very close eye on MTD this week; we’ll get an answer in the next trading session or two.
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.