BALTIMORE (Stockpickr) -- Drug stocks have been one of the best-performing corners of the market in 2015 -- and even if you've missed the move in pharmaceutical stocks so far this year, it's not too late to take notice.
The NYSE Arca Pharmaceutical Index is up more than 12% since the calendar flipped to January, a pretty strong showing that looks even stronger when you consider that the big S&P 500 Index is only up about 3% over that same stretch. On average, drug stocks have been paying investors four times bigger gains than the rest of the market, and that trajectory isn't showing any signs of slowing down. In fact, a handful of prominent pharma stocks look ready to move again this week.
That's why we're turning to the charts to find five big drug stocks to trade for breakout gains this month.
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 $50 billion biopharmaceutical company Shire (SHPG). Shire has been rallying hard so far in 2015. Since January, this large-cap drug stock is up almost 20%. And now, shares look ready to kick off on a second leg higher this week.
Shire is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $255 and uptrending support to the downside. Basically, as SHPG bounces in between those two technically-significant price levels, it's been getting squeezed closer and closer to a breakout above resistance. When that move above our $255 price ceiling happens, we've got a buy signal.
Relative Strength, (not to be confused with RSI) adds some extra evidence to the upside in Shire. That's because relative strength has been in an uptrend of its own since shares bottomed last fall, which confirms that this stock isn't just moving higher -- it's also outperforming the rest of the market long-term. As long as that relative strength uptrend remains intact, expect Shire to keep beating outperforming.
We're seeing the exact same setup in shares of another big pharma stock: $112 billion Bristol-Myers Squibb (BMY).
Just like Shire, BMY is forming a pretty textbook ascending triangle pattern after showing investors a pretty sizable rally in recent months. Since this time last year, BMY is up more than 39%. The $68 resistance level is the price to watch in BMY; if shares can break out above that level, then we've got more upside potential ahead.
Why all of that significance at that $68 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in Bristol-Myers Squibb, 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 BMY's stock.
The $68 resistance level is 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 have been to buy. That's what makes a breakout above $68 so significant – the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. It's important to be reactionary on this trade; don't buy Bristol-Myers Squibb until buyers are able to shove this stock above resistance.
Paris-based drug maker Sanofi (SNY) is another mega-cap pharmaceutical stock that looks tradable this week. The good news is that you don't need to be an expert technical trader to figure out why. In fact, this price pattern is about as basic as they get. SNY has been a "buy-the-dips stock" since the calendar flipped to 2015. So as shares dip for a third time this month, it makes sense to be a buyer here.
Sanofi has been bouncing its way higher in a well-defined uptrending channel since mid-December, moving higher on every test of trend line support. That channel is formed by a pair of parallel trend lines that identify the high-probability range for shares of SNY to stay within. That's what makes it so desirable to get in near the bottom of Sanofi's price channel.
For a little diversification, we're stepping outside drug manufacturers and moving to take a look at retail pharmacy chain Rite Aid (RAD). Just like Sanofi, Rite Aid has been bouncing its way higher in a pretty textbook uptrend all year long. So, here again, it makes sense to buy the dips -- and we're getting a solid bounce signal this week.
Waiting for that bounce is important for two key reasons: It's the spot where shares have the most room 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 the channel breaks, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for this bounce to happen first, you're ensuring RAD can actually still catch a bid along that line before you put your money on shares.
Shares' most recent swing low just below $8 is a logical place to park a protective stop in Rite Aid.
Not all pharmaceutical stocks are created equal right now. That's why we're wrapping up our list today with a downside setup in billion-dollar women's health firm TherapeuticsMD (TXMD). This small-cap pharma stock has actually been a spectacular performer in 2015, rallying more than 50% so far this year. But if you own TXMD, you might want to think about taking some gains off the table soon; this stock is forming a classic reversal pattern right now.
The price pattern in TherapeuticsMD is a head and shoulders top. TXMD's head and shoulders pattern 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 its neckline at $6. If that $6 level gets violated, look out below.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in TXMD. Our momentum gauge has been in a downtrend since March, making lower highs on each of the three price peaks in TXMD's head and shoulders. That's a bearish divergence that indicates buying pressure is weakening. If $6 gets broken, this small stock becomes a sell.