Legal experts insist that last week's Texas District Court ruling that overturned Obamacare will be reversed in a higher court, but the market hates uncertainty, placing a dead weight on affected health care stocks into the foreseeable future. That selling pressure was evident in Monday's session, when the SPDR Select Sector Heath Care ETF (XLV) broke through support at the 200-day exponential moving average (EMA) and into a critical test at the October low.
Insurers with pricing power have less to lose, with or without the law, while selling pressure could drop the vulnerable hospital group to new lows. Poor and lower-class Americans may have few options if the law is repealed, forced to seek care in emergency rooms with no insurance. Hospitals will then be forced to absorb the added costs, undermining profits, or seek relief from legislatures that have shown little interest in helping the poor or disadvantaged in recent years.
The SPDR Select Sector Heath Care ETF broke out above the 2007 high in the mid-$30s in 2012, entering a historic uptrend that topped out in the $70s in 2015. It cleared resistance in June 2017 and added nearly 15 points into January 2018's high at $91.79. The subsequent decline found support on top of the breakout level, yielding a rally to new highs in September. That buying impulse failed a month later, carving a rectangular 10-point range.
The sell-off since Dec. 4 marks the second failure to complete the September breakout. In turn, 2018 has now taken on the look of a large-scale double top, with a small-scale double top embedded within the second high. A sell-off that pierces the October low at $86.27 would set off sell signals in this price structure, exposing downside into the April low in the upper $70s. Unfortunately, a breakdown through that level could signal the end of the multi-year uptrend.
HCA Healthcare, Inc. (HCA) operates 179 hospitals and 120 standalone surgery centers. Its stock topped out in the mid-$90s in 2015, following a multi-year uptrend, and sold off to the mid-$40s during the mini flash crash one month later. The stock cleared range resistance in February 2018, entering a fresh advance that lost momentum near $140 in September. Three nominally higher highs failed to attract trend followers, yielding an early December decline that hit a five-month low on Monday, Dec. 17.
The sell-off has also pierced the October low, ending the string of higher lows in place since 2015, while generating the first test at 200-day EMA support since the stock mounted that level in December 2017. Even so, the bottom isn't likely to drop out any time soon, and trapped shareholders may wish to wait and sell positions during an oversold bounce that faces steep resistance above $130.
Community Health Systems, Inc. (CYH) controls more than 20,000 licensed hospital and acute care beds in 19 states. The stock got stuck near $30 in 2001 after coming public in June 2000. Rally attempts into 2011 failed, signaling long-term laggard behavior, ahead of a 2013 breakout that posted an all-time high at $53.50 in July 2015. The stock then entered a brutal downtrend, posting a long series of all-time lows in 2018.
A recovery wave that started in November 2018 reversed this week at resistance generated by the June breakdown through the 2016 low at $4.15. Support levels from 2018 at $2.50 are now in play, more than 25% below the most recent close, raising a potential short sale opportunity. Of course, not everyone can short stocks under $5.00, but market players with well-honed risk management skills and trading-focused brokers could profit in the coming weeks. (See also: Can you short sell stocks that are trading below $5?)
The Bottom Line
The recent Obamacare ruling should undermine health sector buying interest in the coming months, regardless of the eventual outcome. In turn, these declines could offer profitable short sales.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.