The health care sector hasn't looked especially healthy in the last few months.
But after a rough autumn, health care stocks as a group finally look like they're experiencing the early stages of a turnaround -- and as the sector rebounds, some high-profile names look primed for breakout moves this December.
Health care stocks started the year strong. In the first half of 2015, the health sector managed to rally double-digits, leaving the S&P 500's flat performance in the dust. But health stocks reversed course in the months that followed, giving back all of those gains (and then some) by the time the calendar flipped to October. Since then, the upside has been mild, but it's been enough to set a handful of stocks up for breakout trading setups. Those are the trades that look most likely to rally hard as we head into the final stretch of 2015.
To make the most of that bullish turn in momentum, we're turning to the charts for a technical look at five health care stocks to trade for gains.
In case you're unfamiliar with technical analysis, here's the executive summary: 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, here's a rundown of five technical setups that are showing solid upside potential right now.
Up first is dental equipment supplier Dentsply International (XRAY - Get Report) . Dentsply has enjoyed some strong performance this year, up almost 14% since the calendar flipped to January. But the vast majority of that rally has come just in the last two months of the year. Don't worry if you've missed that move in Dentsply. Shares look primed for a second leg higher this winter.
Dentsply is currently forming an ascending triangle setup, a bullish price pattern that's formed by horizontal resistance up above shares (at $62, in this case), and uptrending support to the downside. Basically, as this stock bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above our $62 price ceiling. When that happens, we've got our buy signal.
Relative strength, (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in Dentsply right now. That's because our relative strength line is holding its uptrend from the middle of the summer, indicating that this stock is still outperforming the rest of the market long-term. As long as that uptrend in our side-indicator stays intact, Dentsply should keep on outperforming the rest of the market.
We're seeing the same setup in shares of big pharma firm Shire (SHPG) right now, albeit with a couple of caveats. Like Dentsply, Shire is currently forming an ascending triangle pattern. Unlike the dental equipment company, Shire's pattern is longer-term, and it isn't quite textbook. That's because it's showing up at the bottom of a downtrend rather than the top of an uptrend in shares. Either way, the trading implications are exactly the same here, though.
Shire becomes a buy on a breakout through resistance up at $230.
Why all of that significance at the $230 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in Shire, 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 Shire's shares.
The $230 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 $230 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Remember to be reactionary here. This isn't a high-probability trade until our $230 line in the sand gets crossed.
Good news: You don't need to be an expert technical trader to figure out what's been going on in shares of $92 billion drugmaker Eli Lilly (LLY - Get Report) . Instead, the price action in this big pharma firm is about as straightforward as it gets. Put simply, Eli Lilly has been a "buy-the-dips stock" going all the way back to last fall -- and as shares come back for a fifth dip this year, it makes sense to buy the next bounce higher.
The price pattern in play in Eli Lilly right now is an uptrending channel, a trading channel that's done a good job of identifying Lilly's high-probability range all year long. While resistance hasn't been as inviolate as support over the course of this setup, that lower bound is really the only level that matters in an uptrend. The next bounce off of that lower blue line is our buy signal in shares of Eli Lilly.
Actually 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 a bounce to happen first, you're ensuring Eli Lilly can actually still catch a bid along that line before you put your money on shares.
Sliding down the market cap spectrum brings us to small-cap biotech stock Agios Pharmaceuticals (AGIO - Get Report) . Agios has been a rough stock to own in 2015. Since the start of the year, shares have given back a whopping 42% of their market value. But long-suffering shareholders could finally be in for a reprieve this winter thanks to a simple reversal setup that's been forming in shares of Agios for the last two months.
Agios is currently forming a rounding bottom pattern, a bullish reversal pattern that looks just like it sounds. The setup indicates a gradual shift in control from sellers to buyers, and it triggers on a move through resistance at $80. It's worth noting that a breakout through that $80 level would also coincide with a break of the downtrend that's harangued shares since the start of the summer. That fact adds some confirmation to the upside setup in shares here.
So does momentum. Momentum, measured by 14-day RSI, has been in an uptrend since late September, making higher lows at the same time Agios' price was forming the rounding bottom pattern. That's a bullish divergence that becomes actionable once increasingly eager buyers can muster the strength to shove this stock back above $80 resistance.
Last up on our list of health care breakouts is $41 billion biopharma firm Alexion Pharmaceuticals (ALXN - Get Report) . Alexion has been all over the place in 2015, currently just a few points shy of breakeven for the year. But like Agios, this big drug stock is currently forming a big classic reversal pattern that's within grabbing distance of triggering a buy.
Alexion has spent the last several months setting up a classic reversal setup called an inverse head and shoulders. The pattern signals exhaustion among sellers, and it's identified by 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." Right now, that's the $180 level in Alexion Pharmaceuticals.
The 50-day moving average has started acting like a good proxy for support in recent sessions – that makes it a logical place to park a protective stop once our $180 breakout level triggers. Shares have been flirting with a breakout for the last few sessions, but they'll need to materially move above that breakout line to signal a buy. It makes sense to keep a close eye on shares of Alexion this week.