Health-care stocks have been going through a long convalescence in the last few months.
A performance comparison shows just how serious the sector's malady is: While the S&P 500 has climbed 11.75 in the past three months, the health-care sector has only managed to muster a 2.3 percent climb over the same time period.
But there's more to those underwhelming returns than meets the eye. Underperformance tends to be cyclical, after all, and that means health-care stocks are due to play catch up with the S&P 500.
That's creating some attractive trading opportunities in a handful of health-care stocks that are starting to make a move higher. So today, we'll take 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.
So, without further ado, let's take a look at five technical setups worth trading now.
First up is medical supply maker Baxter International. Baxter saw strong performance over the last year, climbing more than 19 percent on the heels of solid fundamental performance — but the setup in shares is pointing to more upside in 2013.
That's because Baxter is currently forming an ascending triangle, a price pattern that's formed by a horizontal resistance level above shares and uptrending support below them. In short, as this stock bounces in between those two technical levels, it's getting squeezed closer and closer to a breakout above resistance. When that happens, we've got a buying opportunity in this stock.
Resistance at $69 has been in place since the end of November, and Baxter has hit its head on that price level every time it's tested it. A move through resistance means that buyers are definitively in control of shares. But don't buy until the breakout happens. Then, I'd recommend putting in a protective stop at the 50-day moving average — it's been a good proxy for support in 2013.
We're seeing a similar setup in shares of Dublin-based biotech firm Alkermes. The key difference with Alkermes is that the breakout has already happened — but that doesn't change the trading implications in this stock right now.
Alkermes broke out above a significant resistance level right at the start of the year, and it's been forming a throwback ever since. A throwback happens when a stock moves back down to test newfound support at its former breakout level — in this case at $20.50. And while throwbacks look ominous, they're actually constructive for stock prices because they re-verify the stock's ability to catch a bid at support. For that reason, it's best to think of a throwback as a second chance at a low-risk entry in Alkermes.
Right now, shares are just starting to stage a bounce off $20.50. We could see confirmation of that bounce in today's trading session. I'd recommend being a buyer on the next white bar day with a stop on the other side of $20.50.
You don't have to be an expert technical analyst to see what's going on in Pfizer. Shares of the drug giant have been climbing higher in a well-defined uptrend for the better part of the last year — and shares are up more than 14 percent year-to-date alone. Clearly, Pfizer is a relative strength leader in the healthcare sector right now.
So how do you trade it?
There's a glut of buyers sitting underneath that trend line support line in Pfizer — and it's spurred reversals the last four times shares approached the trendline. Those support and resistance levels give us a high probability range for this stock to trade within. And as you might expect, the ideal time to be a buyer is on a bounce off of support.
When you're looking to buy a stock within a trend channel, buying after a bounce off of support 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).
While that means that some patience will be required for an entry in Pfizer, that patience will pay off.
Opko Health is a small-cap pharmaceutical company that's showing traders constructive price action right now. After rallying hard at the start of December, shares have spent the last few weeks consolidating sideways in a symmetrical triangle pattern. With shares up around 53 percent in the last three months, this setup points to another rally leg along the way for Opko shareholders.
The symmetrical triangle is a continuation pattern that typically splits rallies, giving stocks a chance to bleed off some overbought momentum before moving higher again. For that reason, traders often think it of as a "half-mast pattern." You want to trade the triangle in the direction of the breakout; in other words, if shares push through the trendline resistance level, then you want to be a buyer. But if they fall through support, we've got a sell signal.
Momentum adds some extra confidence to this trade. The 14-day relative strength index has been able to maintain its uptrend from the start of last fall. Since momentum is a leading indicator of price, that supports another rally leg in Opko.
Don't try to predict that, though. Wait for the breakout to happen before you put your money on the line.
A similar consolidation pattern is taking shape in shares of West Pharmaceutical Services right now. In this case, West is churning sideways in a rectangle pattern after making a big move higher in the middle of January. You want to trade this setup exactly the same way, buying a move through $60 resistance and selling a drop through $59 support. That tight range makes a signal just a matter of time.
Don't get too caught up with the rectangle classification in West Pharmaceutical Services, however.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles, rectangles, and other pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
Resistance at $60 is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the breakout above $60 so significant — it indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
The opposite is true for $59 support. Here again, momentum favors an upside move in West Pharmaceutical Services, but it's unwise to actually make a trade until price moves outside of the rectangle.
—By TheStreet.com Contributor Jonas Elmerraji
At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.