President Trump's significant changes to the U.S. tax code have altered the discussions around boardroom tables across America. The lowering of the corporate tax rate and increased incentives for repatriating foreign earnings are two of the main factors that executives are busy discussing. One group that is garnering much attention due to the tax changes is large-cap pharmaceuticals because these companies tend to hold large amounts of capital overseas.

Aside from the lowering of corporate taxes, the movement of capital alone back to the U.S. could be a boon to the repayment of company debt, share buybacks, dividend increases, new business development and likely increased M&A. In this article, we take a look at the charts of one of the most common exchange-traded funds (ETFs) used for gaining exposure to U.S. pharmaceuticals and a couple of its top holdings to get a sense of where prices are headed in 2018. (For more on this topic, check out: Investing in Biotech: Is It Worth the Risk?)

iShares U.S. Pharmaceuticals ETF (IHE)

Long-term traders often rely on weekly or monthly charts to help reduce noise and get a strong sense of underlying momentum. Over the course of the past several weeks, these traders have started to take note of the bullish consolidation pattern developing on the weekly chart of the iShares U.S. Pharmaceuticals ETF.

As you can see in the chart below, the long-term trends are clearly defining the buy and sell points. Bullish traders will likely look to continue buying close to the combined support of the long-term moving average and the ascending trendline and selling near the horizontal trendline. With that said, the most strategic traders will likely want to wait to see if there will be a shift in fundamentals by waiting for a breakout beyond $160 before opening a position in anticipation of a significant move higher. Based on the height of the pattern, target prices would likely be set close to $200. (For more, see: 3 Charts Suggesting Traders Are Bullish on Healthcare.)

Technical chart showing the performance of the iShares U.S. Pharmaceuticals ETF (IHE)

Johnson & Johnson (JNJ)

Aside from being known for its packaged consumer products, Johnson & Johnson is a powerhouse drug manufacturer. Taking a look at the weekly chart below, you can see that the price has consistently stepped higher after spending some time in a short-term consolidation pattern. The break above resistance, which you'll find happened again this week, is a clear sign that the next step is starting, signaling a flood of buy orders. Traders will likely maintain a bullish outlook on the company until the price closes below their stop-loss orders, which will probably be placed below one of the trendlines, depending on risk tolerance. (For more, see: Evaluating Pharmaceutical Companies.)

Technical chart showing the performance of Johnson & Johnson (JNJ) stock

Zoetis Inc. (ZTS)

Zoetis Inc. is the global leader in the development, manufacture and commercialization of animal health medicines and vaccines. Taking a look at the chart, you can see the recognizable step pattern that we discussed above. The price breakout suggests that the bulls are in clear control of the momentum, and traders should expect the uptrend to continue until the price moves below a key level of support such as the 50-day moving average or long-term ascending trendline.

Technical chart showing the performance of Zoetis Inc. (ZTS) stock

The Bottom Line

Recent changes to the U.S. tax code along with rising demand for products from U.S. pharmaceutical companies have many traders looking for a way to trade the move higher. The step-like consolidation patterns have reliably created clear buy and sell signals over the past couple of years, and bulls are expecting this behavior to continue in 2018. (For further reading, check out: 4 Top Pharmaceutical Stocks for 2018.)

Charts courtesy of At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.

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