Healthcare companies have been the focus of traders for much of 2020. As you know, the biotech firms and large companies working on vaccines for COVID-19 have been the dominant focus of traders. However, chart patterns across the sector suggest that the entire segment from diagnostics to health insurance will be worth watching for the remainder of 2020 and likely for a good portion of 2021.
- Many healthcare stocks have been trading within a period of consolidation since the March lows. Recent price action suggests that the next leg of the uptrend could be getting underway.
- Active traders will likely use the trendlines seen in the charts of the Vanguard Health Care ETF (VHT) and its top holdings to determine where to place buy and stop orders.
Vanguard Health Care ETF (VHT)
Most traders who are seeking to gain targeted exposure to specific market segments often turn to exchange-traded products such as the Vanguard Health Care ETF. As the name suggests, the fund's managers have designed the exchange-traded fund (ETF) to track the performance of stocks in the healthcare sector. The fund's holdings comprise a wide range of companies that involve or provide medical or healthcare products, services, technology, or equipment.
Looking at the chart below, you can see that the dotted trendlines have provided clear levels of support and resistance over the past year. Followers of technical analysis often turn toward major trendlines for determining the placement of their buy and stop orders. In the case of VHT shown below, buy orders will most likely be placed as close to current levels as possible. From a risk-management perspective, stop-loss orders could be placed below one of the dotted trendlines, the 50-day moving average, or the 200-day moving average, depending on risk tolerance and outlook.
UnitedHealth Group Incorporated (UNH)
As one of the top holdings of the VHT ETF, UnitedHealth Group Incorporated (UNH) will likely be one of the main focuses of active traders over the weeks ahead. Looking at the chart below, you can see that the price of the stock has been trading within an ascending channel pattern since the recovery from the March lows.
Followers of technical analysis will want to take note of the recent breakout above the upper bound of the channel, which is often used as an indication of the beginning of the next leg in the uptrend. Active traders will most likely set stop-loss orders below one of the dotted trendlines or long-term moving averages, depending on risk tolerance and outlook.
Thermo Fisher Scientific Inc. (TMO)
Another top holding of the VHT ETF that will likely capture the attention of active traders over the days ahead is Thermo Fisher Scientific Inc. (TMO). From the chart pattern shown below, you can see that the stock is trading within a clearly established uptrend with few signs of reversal.
The proximity to the 50-day moving average and two dotted trendlines will likely be a strong enough case for bullish traders to look at buying near current levels. To protect against sudden shifts in market sentiment, stop-loss orders will most likely be placed below $459.57 or $377.97, depending on risk tolerance and outlook.
Healthcare stocks, as represented by the Healthcare Select Sector SPDR ETF (XLV), have performed on par with the broader market. XLV has provided investors with a total return of 18.5% over the past 12 months, just slightly above the Russell 1000's total return of 18.4%, as of Oct. 19, 2020.
The Bottom Line
Companies within the healthcare sector such as those focused on the development of vaccines for COVID-19 have been the focus of most investors. However, based on the charts discussed above, other companies from across the sector in niche segments such as diagnostics and healthcare plans could be worth a closer look
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.