Over the past week, month and three months, the healthcare sector has been the top performer, according to Finviz, racking up 2.4, 5.8 and 13% over those time frames, respectively. One of my favorite strategies - and the most simple in concept - is to wait for a pullback in a strong uptrend stock and then buy as it starts to move higher again. Sounds easy enough, but in practice many traders find it difficult and enter and exit at the wrong time. I'll outline a simple approach for getting in and out. The strategy doesn't win every time, but the losses when they do occur can generally be kept small, and there is no shortage of trades. Here are four stocks in the healthcare sector that are setting up for this strategy.
AbbVie (Nasdaq:ABBV) came on the scene at the start of 2013 and has been in a strong uptrend since. Since mid-March the stock has been kicking higher, from near $37 to a recent high of $43.77. Following that high, the stock saw a few days of selling - a pullback - that is a potential trade setup. By drawing a trendline along the daily bar price highs of the pullback, I create a trigger for my trade entry. If the price rallies above the trendline, I buy. Each day the trigger price will change as the trendline is descending. For this stock, if it continues to rally back above the trendline, the entry price will be near $42.50. The stop is placed below the recent low, which looks like it will be just below $41.13. Targets are at $44 and $45.25, providing reward: risk of 1:1 and 2:1, respectively.
SEE: Technical Analysis: Support And Resistance
Abbott Laboratories (NYSE:ABT) also saw a sharp run up since mid-March and a couple day pullback may set up a trade trigger. Once again, a trendline is drawn along the daily price highs of the pullback. If the price rallies above it, enter long. For this stock, and all of these stocks, keep in mind that the price may continue to decline for some time, before eventually breaking through the trendline (or not). This is why the trendline is drawn first, and then the trade is entered only if a breakout occurs; the stop is then set based on the recent low. Abbott is a bit further away from its "mini-trendline," so the entry price and stop can't be approximated at this point, as the levels may change over the coming sessions. Targets are $38, $39 and $40, and I'd thin off some of the position at each level, assuming it continues to rise following the (potential) entry.
SEE: The Anatomy Of Trading Breakouts
Alere (NYSE:ALR) has the same set up. Here, though, the trendline is hard to draw on the pullback, since it is so small. In this case we simply need to look for a visual clue that the stock is turning higher again. On April 16 the stock had an up day, and the daily bar also had a long lower tail, which, according to candlestick chart reading, indicates buying interest. The strategy indicates an imminent long entry if buying continues, with a stop below the recent low. Therefore, it is possible that the stop may be just below the April 16 low at $25.65 if a push higher in price occurs, triggering the buy order. Target for this trade is $27.50. You may have noticed by now that this strategy is not for long-term trading. Rather, it is meant to capture one wave of buying only. You want to hopefully be out of the trade before a significant pullback occurs.
SEE: Interpreting Support And Resistance Zones
Biogen Idec (Nasdaq:BIIB) is another potential trade setup, but the pullback has only been in effect for a couple sessions. Ideally the pullback should be at least a few days, but I have chosen this stock to explain one other concept of the strategy. Even with this small pullback a mini-trendline can be drawn, indicating the potential future entry price. But what if the stock keeps dropping? At some point we need to abandon the setup and realize this isn't the stock for this strategy. To do this, look to the last significant price low. For Biogen, that is $191.80 on April 5. If the price drops below that low, before moving above the trendline, abandon the strategy. This helps filter out stocks that are starting to weaken. If the stock does move above the trendline, I'm looking at about a $215 target.
The Bottom Line
This strategy produces a lot of signals. When a signal occurs this often, it isn't always going to win. But by entering at the right time - when the mini-trendline breaks - the risk can be kept quite low and the profit potential generally outweighs the losers. Be sure to use stops, as well as a profit target or a trailing stop, to lock in a profit if the trade runs a given amount in your favor. Utilize the strategy during an uptrend with strong stocks within the strongest sector - currently healthcare - to increase the odds of the trend continuing to run once the trade is on. If the price drops below a recent low before breaking the trendline, abandon watching for an entry in that stock and look for greener pastures.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.