Obamacare is back in the news after a long and welcome sabbatical, following the Trump administration's oddly timed decision to ask a federal appeals court to strike down the law "in its entirety." The news had little effect on broad-based sector funds, but many health insurers sold off, hitting multi-month and multi-year lows. Those funds could follow the move lower in the coming months, offering potent short selling opportunities throughout the sector.
The timing makes little sense, given Mueller's departure and multiple polls indicating that Republican health care policy provided firepower for Democrats to grab control of the House of Representative in the 2018 election. The 2020 election is just around the corner, and the GOP will now be stuck with the issue because it has deferred to the courts. This practically ensures months of damaging headlines and political ads that allow Democrats to control next year's political debate.
The Health Care Select Sector SPDR ETF (XLV) broke out above the 2007 high at $37.89 in 2012, entering an uptrend that posted impressive gains into the 2015 peak in the upper $70s. It built a volatile consolidation pattern with resistance at that level and broke out in June 2017, reaching an all-time high at $96.06 in October 2018. A December test at that level attracted aggressive selling pressure, dumping the fund to a seven-month low near $80, while a first quarter bounce reversed at the .786 Fibonacci sell-off retracement level last month.
The fund has settled into a trading range on top of the 200-day exponential moving average (EMA), suggesting a bullish resolution, but the on-balance volume (OBV) accumulation-distribution indicator tells a more bearish story. It has now posted two lower highs off the October peak, indicating that institutions have been quietly exiting positions and hitting the sidelines, raising the odds that price action will soon break 200-day EMA support in the upper $80s.
Cigna Corporation (CI) shares topped out above $170 in June 2015 and entered an orderly downtrend that found support at a 21-month low near $115 after the 2016 election. The stock gained ground throughout 2017, posting an all-time high at $227 in January 2018 and turning sharply lower into March. A third quarter recovery wave failed just 53 cents under the January peak in December, triggering a steep decline that found support in the $170s at year end.
The stock broke March, mid-year and December support earlier this month and fell to a 20-month low during Tuesday's session. Heavy distribution has coincided with the first quarter downturn, dropping OBV to the lowest low since June 2018. The two-year price pattern now shows a completed double top breakdown that predicts additional downside into the 2016 low near $115 in the coming months.
Humana Inc. (HUM) stock broke out above the 2008 high at $88.10 in 2013, entering a strong uptrend that stalled near $220 in June 2015. It finally mounted that resistance level in 2017 and eased into a rising channel that posted impressive gains into November 2018's all-time high at $356. It's been all downhill since that time, with a multi-wave decline breaking March support at $266 during Tuesday's session and dumping the insurer to a 14-month low.
This bearish price action also completed an 11-month head and shoulders breakdown (blue neckline), predicting that aggressive bears will drop the stock another 80 to 90 points in the coming months. In turn, that would fail the 2017 breakout at $218, establishing a steep downtrend that could last into the next decade. OBV reflects this growing fear, topping out two months ahead of price in 2018 and dropping to the lowest low since December 2017.
The Bottom Line
Health insurer stocks hit multi-month lows after the Trump administration resurrected the Obamacare repeal fight and could offer profitable short sales in the coming months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.