BALTIMORE (Stockpickr) -- There's no question about it: The health care sector has been one of the best places to park your money in 2014. Year-to-date, the SPDR Health Care ETF (XLV) - Get Health Care Select Sector SPDR Fund Report has handed investors total returns of 19%. Compare that with the 7.8% total returns that the S&P 500 Index has paid out over the same stretch.
In fact, the health care sector looks better than any other as we head toward the end of the year. Health care stocks currently have the highest relative strength of any sector, an indication that this group is outperforming the broad market through every rally and correction we've seen.
That doesn't mean you should go blindly buying health care stocks this week; some stocks are a lot better-positioned than others for upside this fall. So today, we're taking a closer technical look at five big health stocks that look like breakout buys in this market.
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.
Without further ado, let's take a look at five technical setups worth trading now.
Up first is Humana (HUM) - Get Humana Inc. (HUM) Report , the $20 billion health insurer. HUM is a perfect example of the exact sort of name that's worked all year long. Since January, Humana has rallied more than 28%. But don't worry if you've missed the move so far. Humana looks well-positioned for a second leg of its rally right now.
Humana is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $135 and uptrending support to the downside. Basically, as HUM bounces in between those two technically-significant price levels, it's getting squeezed closer and closer to a breakout above out $135 price ceiling. When that happens, we've got a buy signal.
Relative strength is our side-indicator in Humana right now. Our relative strength line has been making higher lows since the calendar flipped to 2014. As long as that uptrend remains intact, Humana should continue to outperform the rest of the broad market.
We're seeing an interesting setup in shares of mid-cap biopharmaceutical company Cubist Pharmaceuticals (CBST) . Unlike Humana, Cubist hasn't been a blockbuster name to own this year. In fact, it's been underperforming the S&P all year long. Here's how to trade it.
From March until the middle of this month, Cubist had been forming a descending triangle, the bearish opposite of the pattern in HUM. But shares never triggered a sell by violating support at $61, and now, a breakout through the top of the pattern is signaling a reversal of fortunes for investors. By exiting the descending triangle, CBST looks buyable. A broken bearish pattern is often a stronger buy signal as an outright bullish one.
Shares broke out of their triangle pattern pretty violently, so I'd anticipate some consolidation here for at least a session or two. Buyers will get an early warning of when the next leg higher starts by watching momentum, measured by 14-day RSI at the top of the chart. RSI has been stuck in a range for most of this year. A breakout above 70 will lead a secondary price breakout in CBST.
Shares of $10 billion drug maker Incyte (INCY) - Get Incyte Corporation (INCY) Report may have been stuck in a sideways range for most of the year, but Incyte is a name that you should have on your radar this fall. In fact, it's looking tradable because of that sideways range, not in spite of it.
The sideways action in INCY is forming a rectangle pattern, a consolidation setup formed by a pair of horizontal resistance and support levels that basically "box in" shares between $57.50 and $45. Consolidations such as the one in INCY are common after big moves (like the drop at the start of the year); they give the stock a chance to bleed off momentum as buyers and sellers figure out their next move. From here, a breakout above $57.50 is the next buy signal on the way up. A violation of support at $45 means more downside risk suddenly looks likely.
Shares are testing our $57.50 breakout level this morning. If Incyte can catch a bid above $57.50, then its prior highs at $70 look like a good spot to start scaling out of the trade and take gains off the table.
Abaxis (ABAX) - Get Abaxis, Inc. Report has been a momentum name all year long, rallying more than 22% since the first trading session of 2014. It looks like we're coming up on another low-risk opportunity to be a buyer in ABAX -- and the good news is that you don't need to be an expert technical analyst to figure out why.
Abaxis has been bouncing its way higher in a well-defined uptrending channel since the start of February. That channel is formed by a pair of parallel trend line support and resistance levels that identify the high-probability range for shares to stay within. Put more simply, every touch of trend line support has been a low-risk opportunity to get into shares. So, with ABAX testing that support line for the umpteenth time this year, it makes sense to buy the next bounce.
Waiting for a bounce off of support is a critical test 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). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring ABAX can actually still catch a bid along that line before you put your money on shares.
Last up on our "buy list" is $10 billion biopharma stock Pharmacyclics (PCYC) . Pharmacyclics is currently forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern’s “neckline” level (that's the $127 price level in PCYC).
Even though this pattern is still in the early stages (it hasn't started forming its right shoulder yet), the trading implications are exactly the same: if PCYC breaks above $127, it's a buy.
Why all of that significance at that $127 level? It all comes down to buyers and sellers. Price patterns like the ascending triangle or inverse head and shoulders are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Pharmacyclics' stock.
The $127 resistance level was a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers had been to buy. That's what makes a breakout above $127 so significant – the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for $127 to get taken out before jumping in.
To see this week's trades in action, check out the Technical Setups portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in the names 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