BALTIMORE (Stockpickr) -- Health care stocks have been good for your portfolio's health in recent months -- and they're likely to stay that way as we dig deeper into 2014.
From a technical standpoint, the health care sector has been one of the best-performing collections of stocks since before the start of the summer, even besting the S&P 500's impressive rally in 2013. So with a somewhat lackluster New Year catching investors' attention in January, it makes sense to keep buying what works.
That doesn't mean it's smart to buy any health care names right now, but the stocks showing technical strength in this market should continue to stomp the big indices. Today, we'll take a closer technical look at five of them.
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.
At first glance, it may seem like shares of GlaxoSmithKline (GSK) haven't done much in the last six months. In that time, GSK has climbed all of 5.12%, while the S&P has trudged nearly 9% higher. But while GSK has fallen short of the mark lately, that's only because it's been forming a long-term bullish price setup.
Now, with a breakout this week, we're looking at a good time to be a buyer in GlaxoSmithKline.
GSK spent most of those last six months forming an ascending triangle pattern, a bullish price setup formed by horizontal resistance above shares at $53 and uptrending support to the downside. Basically, as GSK bounced in between those two technically important price levels, it was getting squeezed closer and closer to a breakout above $53. That breakout got confirmed in yesterday's price session, which makes now a good time to be a buyer.
While relative strength had been trending lower for a while now, the breakout shook the RS line out of its slump. That bodes well for continued outperformance in GSK going forward. From a statistical standpoint, relative strength uptrends typically precede outperformance on a three- to 10-month time horizon.
Sirona Dental Systems
We're seeing the exact same setup in shares of dental equipment maker Sirona Dental Systems (SIRO) right now, but with two key differences: First, the SIRO pattern is even longer-term than the one in GSK, and second, it hasn't broken out yet.
The breakout level to watch in SIRO is $73; a move through that level is the signal that it's time to be a buyer in this mid-cap dental stock. The longer-term price setup in shares comes with equally longer-term upside implications when a breakout does happen in shares.
Whenever youre looking at any technical price pattern, its critical to think in terms of those buyers and sellers. Triangles and other pattern names are a good quick way to explain whats going on in a stock, but theyre not the reason its tradable. Instead, it all comes down to supply and demand for shares.
That $73 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
You don't have to be an expert technical analyst to figure out what's going on in shares of Novartis (NVS). This price setup is about as simple as it gets. Right now, Novartis is forming an uptrending channel, a bullish price setup that's formed by a pair of parallel support and resistance levels that NVS has been bouncing between all the way up. When it comes to price channels, up is good and down is bad -- it's as simple as that.
So Novartis looks very good right now.
It pays to be disciplined when you buy NVS. Shares are currently in the middle of the channel, but the optimal time to buy comes as close to trendline support as possible; in short, you want to "buy the bounce." That may require some waiting, but it's worth it for the extra high probability trade.
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 youre wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, youre ensuring Novartis can actually still catch a bid along that line.
The Ensign Group
Small-cap skilled nursing and rehab facility operator The Ensign Group (ENSG) is another uptrending channel to watch this week -- but it's even more timely than Novartis, as it's testing a potential bounce off of trendling support right now. Just like with NVS, the signal to buy comes on the first white bar off of support. We could see that as early as tomorrow.
The 50-day moving average has been a stellar proxy for support all the way up in ENSG. That makes it a logical spot to keep a protective stop below. If that stop gets triggered, the uptrend will be broken, and you won't want to own shares anymore anyway.
ENSG is another name that's showing off a positive trend in relative strength right now. With the S&P in corrective mode this month, relative strength remains the single most important indicator you can have in your technical toolbox in 2014; just make sure you wait for the bounce in price (not relative strength) before clicking "buy."
Last up is $26 billion health benefits company Aetna (AET). Aetna had been forming an inverse head and shoulders pattern for the last few months, and shares broke out above the neckline at $69 at the start of January. Even if you missed the breakout in AET, though, a throwback is giving traders a second chance at a low-risk entry in this stock.
A throwback happens when a stock moves back down to test newfound support at its former breakout level -- in this case at $69. And while throwbacks look ominous, theyre actually constructive for stock prices because they re-verify the stocks ability to catch a bid at support. Now looks like a good time to build a position in AET -- just keep a tight stop.
Momentum, measured by 14-day RSI, adds some extra confidence to the buying opportunity in AET. Despite the retracement, RSI remains in a solid uptrend right now. The classic minimum measuring objective on Aetna's price pattern puts a target at $88.
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.