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5 Health Care Stocks Setting Up to Break Out - views
BALTIMORE (Stockpickr) -- It doesn’t matter which side of the political aisle you sit on -- one way or the other, the Supreme Court’s Obamacare ruling on Thursday has big implications for the industry as a whole.
And, no surprise, it’s got big implications for a handful of health care stocks. Today, I want to show you five that are breaking out as a reaction to the news.
On Thursday, the Supreme Court ruled 5 to 4 to uphold the individual mandate in President Obama’s Affordable Care Act. It’s a controversial law, and the Supreme Court’s decision is equally controversial, but I’m not here to talk politics. Instead, I’m more interested in the trading opportunities that are coming out of the ruling.
Hospital operators rallied hard on Thursday from the news, but in most cases, those boosts were too quick to take advantage of. Still, plenty of investors were scouring the healthcare industry for buying opportunities, and all of that demand pouring into the sector is just now creating a handful of technical trading opportunities 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.
Here’s a look at five technical health care setups that could deliver breakout gains to your portfolio this week.
Shareholders of Abbott Labs (ABT) are having a strong year in 2012. So far, shares of the $102 billion pharmaceutical and medical device stock have rallied 15% year-to-date. And thanks to last week’s buying pressure, shares could have a lot further to go in the second half of the year.
Abbott had been forming an inverse head-and-shoulders pattern since the start of May, consolidating after making a swift move up from early February lows. The inverse head and shoulders is a pattern that’s identified by two swing lows (the shoulders) that occur at around the same price level. They’re separated by a deeper swing low (the head). For an inverse head and shoulders, the price level to watch is the neckline, the resistance level that acts as a sort of upside barrier for shares. In Abbott’s case, that neckline was at $63.
On Friday, Abbott gapped up, pushing through its neckline and triggering a buy signal in shares at the open. The volume spike on Friday was a good indication that buyers were participating in the breakout.
While ABT isn’t a textbook inverse head and shoulders, it’s a solid setup. That said, there are a couple of similar trades out there that are looking less extended now.
One of those is Pfizer (PFE), the big pharma giant that’s behind blockbuster drugs like Celebrex and Viagra. Like Abbott, Pfizer is forming an inverse head and shoulders pattern. Unlike ABT, Pfizer’s setup is less far along, giving investors an opportunity to get in earlier.
It’s worth noting that patterns like Pfizer’s inverse head-and-shoulders setup don’t work because of mystical forces or the shape of the setup; at the end of the day, it just comes down the buyers and sellers, supply and demand. For Pfizer, we know that there has historically been a glut of sellers at an above the $23 level (the neckline), so a breakout above $23 sends an important message: It tells us that increasingly eager buyers have absorbed all of the supply of shares that previously were offered at that level.
That’s part of why the inverse head and shoulders is commonly described as a pattern that depicts exhaustion among sellers.
Declining volume for Pfizer is actually a good sign for shares -- it means that participation in PFE has been declining as the pattern progressed and PFE consolidated. A volume spike on a break above $23 (like the one in ABT) is a good sign that the move is valid. Wait for that to happen before buying shares.
Brookdale Senior Living
The last inverse head and shoulders setup to watch is Brookdale Senior Living (BKD), a small-cap senior and assisted living community operator. BKD is a more textbook inverse head-and-shoulders pattern because it’s shaping up as a reversal after a selloff. The breakout above the neckline happened on Friday too, but it’s still close enough to that price level to justify buying here.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
If you decide to be a buyer here, I’d recommend putting a protective stop just below the right shoulder at $16.50.
Allergan (AGN) has been in a solid uptrend since back in September 2011, when the broad market was selling off. Since then, shares have rallied more than 31% as the stock has bounced up the uptrending channel. A bounce last week points to even more upside in 2012.
The fact that Allergan has been trading in a well-defined channel since September makes this stock especially tradable -- after all, we’ve got target support and resistance levels both to the upside and the downside. The fact that Allergan has bounced off of trendline support no fewer than five times over that stretch also tells us that this stock can consistently catch a bid at support. The 200-day moving average has acted as a good proxy for support over the course of the uptrend – it’s a logical place to put a protective stop.
With AGN bouncing off of support this week, now’s a good time to be a buyer. Risk-averse traders should aim to exit the position well before AGN approaches trendline resistance.
Allergan was included on a list of 7 Stocks Set to Surpass $10 in 2012.
Last up on our list of health care trades is Medtronic (MDT), a $40 billion medical device company. Medtronic had been looking bearish since the start of the year, tumbling more than 5% by the start of June as shares bounced inside a downtrending channel. But a channel breakout in this medical stock points to higher ground getting hit in the second half of the year.
Medtronic broke out of its downtrending channel on Friday, taking advantage of momentum in the rest of the healthcare sector. The breakout puts MDT’s primary trend back in “bull mode,” signaling a buying opportunity for traders who want to get ahold of the new trend early. The fact that MDT is within a handle of a new 52-week high is another big factor in this stock’s upside -- a breakout above February’s peak should shove some extra demand behind shares.
Momentum, as measured by 14-day RSI, broke its down downtrend in the middle of June, adding some extra support for a new uptrend. Since momentum is a leading indicator of price, that’s a good sign that MDT is in for more upside in July.
I also featured Medtronic recently in “5 Blue-Chip Stocks Ready to Boost Dividends.”
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, 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.