The healthcare space continues to be on fire, with big names pushing through the 52-week highs. Overall, the stock market appears to have found some footing but that is where the healthcare story gets interesting. Sectors rotate in and out of favor as the stock market peaks and troughs. Traditionally, healthcare outperforms near market peaks and into the initial decline of the broader market. Healthcare has been a top dog so far this year; the Health Care Select SPDR (ARCA:XLV) exchange traded fund (ETF) is up 12.68%, rivaled by the Consumer Staples Select SPDR (ARCA:XLP) ETF which is up 9.98% and the Utilities Select SPDR (ARCA:XLU) ETF is up 5.89%. Consumer staples and utilities are also sectors that often outperform the near market tops and into the initial phase of a broader market decline. While these four healthcare-related stocks are not necessarily the highest performing stocks in the sector, the stocks are some of the biggest and well known. With the trends currently accelerating to the upside, there may be more room for upside profits in the healthcare space. Each has a critical support level though, and if penetrated warns of a correction in the stock, and likely the broader market as well.
SEE: Technical Analysis: Support And Resistance
Johnson & Johnson (NYSE:JNJ) was relatively flat since the middle of 2011, stuck in a range between approximately $61 and $66. After testing the lower region of the range in June, Johnson & Johnson's stock has rallied aggressively, pushing through resistance and accelerating into a brand new 52-week high ($69.18) on July 17. The move above $66, as well as the jump above the July 2011 high at $68.05, signals that it may not be out of steam yet. The next target is $71 followed by a loftier target at $77. A drop back below $67 could spoil the bull party, indicating a false break-out and a retreat towards the $63 to $61 region. The relative strength index (RSI) indicator tends toward a bearish case. After the initial price surge in June, further rallies in price have not been confirmed by the RSI. Barely budging, the flat RSI indicates this rally may be running out of steam ... but maybe not quite yet.
Merck & Co. (NYSE:MRK) also took off in June and July, hurtling beyond the former resistance at $39.50. A strong day on July 17 created a new 52-week high at $44.37, indicating this stock is still in a rally mode. Most targets have already been hit, but extrapolating prior trends the current rally could run into the $46 to $48 region before encountering further resistance. A drop below $41 is the first sign of danger for the stock as it would create a lower low - although not a major one. Beyond this is $39.50, the former resistance level through early 2012 should now provide support. Given the steep rally, a drop below $41 is likely to test the $39.50. The RSI moved higher in June along with the price, as the price rallied over the last few sessions the RSI stayed below the late June peak. This could be a bearish divergence in the making, and if so, this stock may be getting over extended. Shorting is not recommended until some of the bearish price confirmation occurs - this is still an uptrend.
Abbott Laboratories (NYSE:ABT) has been a star performer since the middle of July 2011. Since then, the stock has been on an aggressive rally putting in continually higher highs and higher price lows. The next upside targets are at $68 and $70, either of which could provide some resistance. Minor support is just above $63, followed closely by the trendline support at $62. If these levels are penetrated, it is noteworthy but a drop below $59 pierces the April and June lows, signaling that the uptrend is likely over. Since March, the RSI has been rather anemic. So, like the stocks mentioned prior it may begin to face some headwinds. With new highs still racking up though, being long remains the play until proven otherwise.
SEE: Interpreting Support And Resistance Zones
Amgen Inc. (Nasdaq:AMGN) is in a very similar technical position to Abbott Laboratories. The resistance level is likely to be at $80, although there is one additional target at $84. There is little support until the rising trendline at $71, although it will take a drop below $67.64 to really signal that the stock is in danger of a more significant reversal. A drop below the minor support at $73.50 may provide an earlier clue of potential trouble. The RSI is once again struggling to push past former highs, even though price is rallying aggressively. Momentum is likely not sufficient to keep this aggressive trend going much longer. Yet again, though, more upside could be in the cards as the trend is decidedly bullish at this time.
The Bottom Line
Healthcare has been one of the top performing sectors for the last six months, and these stocks are still moving higher. Since healthcare stocks typically outperform near broad market peaks, these four stocks serve a double purpose. They can be traded individually, but also provide an analytical context. A break below support is bearish for the stock and potentially for the broader market as well. The trend right now is relentless to the upside though. Despite non-confirmation from the RSI indicator and a potential top near-by, the uptrend remains intact as long as the higher highs and price higher lows keep coming.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article