How to Trade UnitedHealth Following Earnings Beat

Buy UnitedHealth on weakness to the monthly value level at $263 and reduce holdings on strength to its quarterly risky level at $288.63.
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UnitedHealth Group  (UNH) - Get Report beat earnings-per-share estimates Wednesday and the stock gapped higher, opening at $276.44 which targets its quarterly risky level at $288.63.

The healthcare insurer maintained its 2020 earnings guidance and indicated it would seek financial help during the COVID-19 pandemic. Here’s the coverage of the earnings report from TheStreet.

At the open Wednesday, the stock was down 6% year to date and in bull market territory 47.2% above its March 23 low of $187.72. The stock is also 9.9% below its all-time intraday high of $306.71 set on Feb. 19.

The stock is consolidating a bear market decline of 38.7% from its Feb. 19 high to its March 23 low.

The stock is reasonably priced with a p/e multiple of 17.44 and a dividend yield of 1.64%, according to Macrotrends.

Consumers looking for health insurance from UnitedHealth should understand that individual coverage for patients under 65 years old will likely be written on three-month intervals. Premiums are thus revised based upon claims history.

A major focus is on providing supplemental insurance for patients covered by Medicare. This includes prescription drug coverage. To qualify for this plan patients must be a member of AARP.

The Daily Chart for UnitedHealth

Daily Chart For UnitedHealth

Daily Chart For UnitedHealth

Courtesy of Refinitiv XENITH

The daily chart for UnitedHealth shows the stock traded sideways over the last 52 weeks until spiking higher on Nov. 15. 

This resulted in the formation of a “golden cross” on Nov. 29 when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its all-time high of $306.71 set on Feb. 19.

The stock gapped below its annual pivot at $297.29 on Feb. 24, then tested its 200-day SMA at $257.79 on Feb. 27. 

When the stock broke below this average on March 16 there was a quick move lower to $187.72 on March 23.

The rebound stayed below the 200-day SMA until April 8. Holding this average on April 13 set the stage for a positive reaction to earnings.

The stock gapped above its monthly pivot for April at $263.00 on Tuesday leading to the gap higher this morning. This gap was filled after the stock stayed shy of its quarterly risky level at $288.63.

The Weekly Chart for UnitedHealth

Weekly Chart For UnitedHealth

Weekly Chart For UnitedHealth

Courtesy of Refinitiv XENITH

The weekly chart for UnitedHealth is positive with the stock above its five-week modified moving average of $260.19. 

The stock is well above its 200-week simple moving average or “reversion to the mean” at $220.22.

The 12x3x3 weekly slow stochastic reading is projected to rise to 47.37 this week up from 42.37 on April 9.

During the week of Jan. 24 this reading was above 90.00 putting the stock in an “inflating parabolic bubble” formation. Bubbles always pop as did the bubble for UnitedHealth.

Trading Strategy: Buy weakness to the monthly value level at $263.00 and reduce holdings on strength to its quarterly risky level at $288.63. The annual risky level is up at $297.29.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Second-quarter 2020 and monthly levels for April were established based upon the March 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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