Healthcare has been one of the hottest sectors over the last year and continues to find new highs. The HealthCare Select Sector SPDR (XLV) was up 2.36% in the last week. That doesn't mean that every company is a good bet at any price, though. Here are four large-cap drug stocks to monitor for an entry point.
Gilead Sciences Inc. (GILD) is charging at the $100 mark, closing at $99.49 on Aug. 15. Bursting out of small consolidation that contained the stock between the end of July to mid-August, being able to break and hold above $100 will be a major test for the stock. The trend is strongly up, and since $100 is considered a psychological pivot point, it can also be used as a short-term entry point. If the current price run reaches $105 or higher, look to buy a pullback to $100 with a stop a couple dollars below and a target beyond $105. If the price falters at $100, wait to buy a pullback to trendline support near $95 to $94; a stop can be placed below $90 and if the uptrend continues look for exit above $105. (For more, see: How Gilead Sciences Became a Big Name in Biotech.)
Amgen Inc. (AMGN) has been moving in a trend channel higher through most of 2013 and 2014. Its share price could to continue to run toward the top of the channel near $135, although at current levels downside risk may outweigh upside potential. That said, if the price breaks above the channel it indicates a very strong price wave, potentially reaching $145. Until proven otherwise, the channel is the main technical feature to watch. If resistance holds near the top of the channel in the $135 region, hold off on buying until the price reaches the lower portion of the channel, near $120 with a stop several dollars below. (For more, see: Channeling: Charting A Path To Success.)
Covidien plc (COV) snapped higher almost 30% in mid-June to a high of $92.68, and has since pulled back. A rally above $88 will break the short-term downward trendline, and could mean another wave higher for the stock. If that scenario plays out, the target is just below $100. Initially, the stop loss can go below $82, but if a higher swing low forms the stop can moved to just below that. Strong moves higher, such as the one seen in June, have a tendency to "fill" given enough time. When that will occur is anyone's guess, but it's possible that the price will retrace all the way back to the $75 to $73 region. If and when that occurs, it should present another good buying opportunity. (For more, see: The Stop-Loss Order: Make Sure You Use It.)
Unlike the three previous stocks, Zoetis, Inc. (ZTS) isn't in a long-term uptrend. Going back to early 2013, the stock has been more range bound. Since April the stock has been rallying strongly though, and has cleared resistance in the $33.35 region. It also broke a descending trendline which marks the swing highs of the range. Therefore, it could be interpreted that this stock has already broken out, in which case it has a target of $35 to $37. The stock's all-time high is $35.42, so resistance is expected in that area. If the price manages to climb there, and then falters, it's probably best to take profits instead of trying to squeeze out a larger gain. (For more, see: Pfizer Readies Zoetis For Market.)
The Bottom Line
The healthcare sector remains strong and the S&P 500 in an uptrend. Even so, that doesn't mean buying these healthcare stocks at any price is a wise play. Consider the price in the context of larger patterns, such as trend channels (when applicable) or how the waves and pullbacks of a trend are playing out. Usually buying on a pullbacks offers a better reward-to-risk ratio because a stop can be placed below a recent low; when buying on new highs a stop loss area can be harder to find. No method of analysis or trading is perfect, so ideally risk only a small amount of your account on each trade, that way even a string of losses won't significantly draw down the account. (For more, see: Range-Bound Traders—Breakout Traders—Channel Traders.)