BALTIMORE (Stockpickr) -- Health care stocks are looking, well, healthy right now. And that's creating some big trading opportunities this month.
As a sector, health care has been one of the best-performing corners of the market in 2014. While the S&P 500 Index has pushed 1.47% higher since the calendar flipped to January, health care stocks have managed an average rally of 6% over the same period -- and that's just the "average" health care gain. Some individual names are up much further year-to-date.
Don't worry if you've missed the moves in this sector; they're far from over. From a statistical standpoint, the relative strength we're seeing in health stocks is typically tied to continued outperformance for as much as ten months. From here, a look at the price action can help pinpoint which stocks to focus on in March.
So which health care names look best-positioned for big moves? Today, we're taking a 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.
First up is $21 billion hospital operator HCA Holdings (HCA). HCA has pushed almost 30% higher in the past year, outperforming the S&P 500's 19% gains by a big margin. And now, shares look ready for another breakout.
HCA is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance to the upside at $52 and uptrending support below shares. Basically, as HCA bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakout above $52. When that happens, it's time to be a buyer.
What's the significance of that $52 resistance price? It all comes down to buyers and sellers. Patterns are just a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. After all, it's supply and demand for shares, not shapes on the chart, that create high-probability setups for investors.
The $52 level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have previously 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. Keep an eye on HCA's $52 price level in the sessions ahead.
There's a triangle of a different sort setting up in shares of $61 billion biopharmaceutical firm Celgene (CELG). Shares of CELG have slid 11% since the start of 2014, but this setup is proof that context matters in stock trades. Zoom out on the chart, and a very different picture emerges than a stock that's simply moving lower.
Celgene is currently forming a symmetrical triangle pattern, a setup that's also known as a "coil". The symmetrical triangle is made by a pair of trend lines that are converging at approximately the same rate. The buy signal comes on a breakout to the topside of the channel, currently right at the $165 level. If shares can take out $165, then we've got a strong indication that buyers have regained control of shares.
One important factor to keep in mind with coil trades like Celgene's is the fact that they tend to come with violent breakouts. That's because CELG's price volatility is getting constricted by the converging trend lines in shares, reducing until the point where the stock breaks out of the triangle. Since stock volatility is cyclical (it swings from periods of low volatility to high volatility), the relatively low volatility of CELG as it gets squeezed here is most likely to be followed up with a big, fast move.
That's some extra incentive to keep a closer eye on this name in March. Shares don't become buyable until that resistance line gets broken.
We're taking things back to basics with shares of $165 billion pharmaceutical giant Merck (MRK). You don't have to be an expert technical analyst to figure out what's going on in shares of this big pharma firm -- a quick glance at the chart will do. We're looking at an optimal buying opportunity in this name right now.
Merck is currently bouncing higher in a textbook uptrending channel. When it comes to channels, up is good and down is bad -- it's really just as simple as that. MRK's channel is bounded by resistance above shares and trend line support below them; those two parallel trend lines provide a high probability range for shares of this stock to trade between. And so, as shares come up on trend line support for a sixth time since last fall, it makes sense to buy the bounce.
We're seeing the exact same setup in shares of momentum mover Biogen Idec (BIIB). Since the end of October, shares of BIIB have been bouncing higher in a textbook uptrending channel, and so, as shares test a seventh bounce off of support, it makes sense to be a buyer here.
Waiting to buy 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). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring BIIB can actually still catch a bid along that line before you put your money on shares.
Relative strength in BIIB has been stellar over the course of the channel, an indication that this stock is rallying harder than the broad market on the way up, and correcting less deeply on the way down. As the S&P starts to show signs of a pullback, relative strength becomes the single most important indicator you can have in your technical toolbox this month.
Not all of the names we're looking at this week are upside trades after big moves in the healthcare sector, some names are looking "toppy" in 2014. Jazz Pharmaceuticals (JAZZ) is a perfect example. While Jazz has shown outstanding upside action over the last year (it's up 154% over that 12 month stretch), the rally is starting to show some cracks.
JAZZ is forming a head and shoulders pattern, a bearish reversal setup that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal comes on a move through the neckline at $142 if that $142 level gets violated, it's time to steer clear of JAZZ.
Momentum, measured by 14-day RSI, has been making lower highs over the course of the pattern in JAZZ. In other words, our momentum gauge is telling us that down days are getting the better of up days in this stock, even as shares attempt to move higher. So, if shares can't catch a bid at $142 anymore, then it's time to sell.
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.