- 5 Stocks Under $10 Set to Soar
- 5 Big Trades for Year-End Gains
- 3 Stocks Rising on Unusual Volume
- 3 Stocks Spiking on Big Volume
- 4 Stocks Triggering Breakouts on Big Volume
5 Summer Buy Signals From the Health Care Sector - views
BALTIMORE (Stockpickr) -- Health care stocks have led the way for the broad market in 2013 -- and they're continuing to lead the pack in the second half of the year.
As a group, health stocks have performed well this year. The iShares Dow Jones US Healthcare ETF (IYH) is up more than 22% year-to-date, besting the S&P 500 by a whopping 7% over the same time frame. For every dollar a broad market index has gained in 2013, health care indices have gained $1.50. But the health care sector's leadership goes beyond just outperformance.
Health care has been a step ahead of major indices in terms of timing too. Most large health stocks rolled over weeks before the S&P 500 started on its multimonth correction -- and now, health names are showing signs of strength again. That suggests that Mr. Market could be heading higher too in July.
That's why we're taking a technical look at the trading setups brewing five health care stocks today.
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.
If 2013 has been a great year for health care as a sector, it's been a phenomenal year for hospital owner Tenet Healthcare (THC); year to date, Tenet has rallied more than 33%. But the price action in shares of this $4.5 billion health stock points to even higher levels this summer. Here's how to trade it.
Right now, Tenet Healthcare is forming an ascending triangle pattern, a setup that's formed by horizontal resistance above shares at $48 and uptrending support to the downside. Basically, as THC bounces in between those two technical price levels, it's getting squeezed closer and closer to a breakout above that $48 price ceiling. When that happens, we've got our buy signal.
THC moved up quickly during the first part of 2013, signaling an "overbought" reading in momentum back in March. Since then, momentum has been bleeding off in a downtrend.
I'd look for that downtrend in RSI to get broken right before shares of THC push up through $48. When it happens, keep a tight protective stop in place.
You don't have to be an expert technical analyst to figure out what's going on in shares of Cigna (CI) -- the health insurer has been bouncing along in a well-defined uptrend since all the way back in November. What's significant is the fact that Cigna's uptrend didn't break along with the S&P in June; instead, buyers have continued to propel this stock higher.
As you might expect, the best time to be a buyer in Cigna is on a bounce off of support. Buying off a support bounce 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). Cigna's positioning in the middle of its trend channel means that now is a less-than-ideal time to take an entry in this stock, but it also suggests that a correction back down to the trendline isn't far off.
I'd suggest waiting for that to happen before piling into this stock. The 50-day moving average has acted as a perfect proxy for support all the way up the channel. That's where I'd recommend putting a stop loss.
West Pharmaceutical Services
We're seeing the exact same setup in shares of West Pharmaceutical Services (WST) right now. Like Cigna, West has been bouncing higher in an uptrending channel all the way back since November. Also like Cigna, this $2.5 billion healthcare stock didn't violate its uptrend when the broad market did.
That relative strength makes West worth watching right now. Notice that I used the word "watching" -- West is hitting its head on trendline resistance, a price level that's batted shares back down the last six times it's been tested. I wouldn't expect anything different on attempt number seven. Instead, look to go long on a bounce off of support.
Again, waiting for a bounce is important here. Trendlines do eventually fail, and when they do, you don't want to be the one left holding the bag. By waiting for the bounce off of support to happen first, you do cede a few potential points of profits -- but more important, you also verify that WST can still catch a bid before you put real money on the line.
Johnson & Johnson
Johnson & Johnson (JNJ) is a good example of leadership from the healthcare sector. This blue-chip health stock broke its uptrend line back in early May, signaling a sell for shares. But after a few weeks of correcting lower, Johnson is starting to look bullish again thanks to a rounding bottom pattern in shares.
The rounding bottom indicates a gradual shift in control from sellers to buyers in a stock. While the textbook version of this pattern usually occurs at the bottom of a downtrend (unlike JNJ's pattern at the top of its recent uptrend), the trading implications are exactly the same either way: the buy signal comes on a breakout above the top of the pattern. For Johnson & Johnson, that's $88.
JNJ is testing its breakout level in today's session. I'd suggest going long if shares can sustain a print above $88 this morning. Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles, rounding bottoms 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. Instead, it all comes down to supply and demand for shares.
That resistance line at $88, 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 what makes JNJ's test of $88 so important today.
Last up on our list of health care trades is LabCorp (LH), the $9.3 billion medical diagnostics firm. LabCorp spent the first few months of 2013 rallying hard, making new highs in a parabolic move. But parabolic price action can only last for so long -- and shares of LH have been consolidating in a rectangle since May. So how do you trade it?
The rectangle pattern is formed by horizontal resistance above shares at $101 and horizontal support below shares at $98. The pattern gets its name because it basically "boxes in" shares of LH in between those two technical levels. This is a breakout trade -- it becomes buyable when shares of LH move outside of the rectangle pattern that's been holding them hostage.
I like to think of rectangles as an "if/then trade". In other words, if shares break out above $101, then it's a signal to buy shares. Otherwise, if shares break down below $98, then AJG is a short candidate. Don't put money in LH until it resolves its next direction with a breakout.
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