Healthcare Breaks Out and We’re Buyers!

by JC Parets  -  November 22, 2019

I’m wrapping up what has been another great trip to India where we’ve been talking a lot about our bullish thesis for stocks. Not just in the U.S., but all over the world as I’ve been writing about here.

I just want to say that as sector after sector and index after index continue to breakout past key levels of resistance, I can’t help but be amused by this really cool statue of the Hindu god Ganesha I ran into here. After all, among other characteristics, he is widely known as the remover of obstacles.

In keeping with our conviction that we want to be on the lookout for stocks to buy, today I wanted to share some charts from a colleague and fellow technical analysts Tom Bruni that show signals of breakouts in the Healthcare and Pharmaceuticals sectors.

Healthcare Breaks Out?

By Tom Bruni

Here’s the US Healthcare Providers (IHF) which is emerging from a consolidation via a sharp rally as momentum gets overbought.

Overall this looks like the start of the subsector’s next major move to the upside, but we’ll get more information about its sustainability from seeing how prices digest their more than 20% gains since early October. Bulls want to see that correction occur through time, rather than price, with IHF preferably staying above its July highs near $180.

Healthcare Providers, which had previously lagged along with Biotech, have gained traction over the last several weeks and have driven the move in the broader Healthcare sector ETF (XLV) to new all-time highs. Rotation within the sector continues to support higher prices.

Here’s United Healthcare, which is the largest holding in IHF at 25%, rallying sharply after sellers failed to hold it below support near $230. After a 30% rally over the last eight weeks this is not a chart we want to be buying today, but from a structural perspective, it’s very clear where the path of least resistance lies.

And if United Healthcare is doing well then it’s tough to be too bearish Healthcare Providers as a subsector.

With that being said, there are four names in the space that we think are well-positioned to take advantage of continued strength.

A Pharmaceuticals Comeback Story

Over the last two months the pharmaceutical sector has been basically flat, but several signs have emerged to suggest that we’re potentially at a major inflection point.

I want to start with a chart that we’ve used for the last few years to guide our decisions around Nifty Pharma. Since 2015 prices have been in a strong downtrend with momentum in a bearish range. After failing a breakout attempt in September 2018, prices drifted back toward the lows set a few months earlier.

In September 2019 we saw prices break below their 2018 lows and support at the 61.8% retracement of its 2011-2015 rally, but momentum diverged positively and prices are now attempting to close back above support. A weekly close above $8,000 would confirm a failed breakdown and trap all of the sellers below support, creating an environment where there are a lot of natural buyers.

In addition to the improvements we’re seeing on an absolute basis, we’ve also seen the ratio of Nifty Pharma vs Nifty 500 reach its downside price objective and turn higher. This target was created by taking the 161.8% extension of the ratio’s 2014-2015 rally. Not only have prices bounced from this support level twice, but they’re also confirming the bullish momentum divergence that’s been building since the summer.

If Pharma stocks are going to bottom on a relative basis, this looks like a very logical place for it to happen.

These charts are very compelling and suggest we may be at a major inflection point in the Pharmaceuticals sector. As long as prices of Nifty Pharma are above $8,000 on a closing basis and the Nifty Pharma/Nifty 500 ratio is above its year-to-date lows, then our thesis is intact and the bias is to the upside.