Divergence in LHC Group Stock Points to a Pullback

Shares of LHC Group, Inc. (LHCG), an at-home health care provider, have been soaring during the pandemic. The stock is up 80% from the lows it posted during the economic shutdown. It's also up 20% from the highs set before the shutdown occurred. 

As the stock trades near its all-time highs, investors may be about to get a better price to buy more shares. Looking at its price chart, this stock is in a divergence between its price and its relative strength index (RSI).

The 10-day RSI below is posting a lower low even as the stock is trying to make a higher low. The RSI is was recently in overbought territory, above 70, and is signaling for a pullback.

But the failure to stick to the uptrend in the RSI shows us that momentum is fading and that the stock is set to slip in the coming weeks. Take a look.

Chart showing the share price performance of LHC Group, Inc. (LHCG)
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Every time this occurred over the past two years, the price trended lower for weeks. Each of the pullbacks highlighted by the red arrows above shows at least a 10% drop. The one earlier this year came right before a 30% crash.

Going into this divergence, we don't know what to expect, but it tells us that a pullback is increasingly likely. The stock is up more than 80% in the past few months and is now diverging from the RSI. I'm expecting a pullback of at least 10%.

As the price chart points out, the stock is still in a massive uptrend overall, so I don't think we'll see a pullback that lasts too long. At-home health care is an industry that's just beginning to boom.

The Bottom Line

The recent surge in LHC Group shares has left the stock sitting with a divergence between the RSI and its share price. The divergence is calling for a quick 10% pullback in the stock before the rally resumes.

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