The healthcare sector has been on the rise since Donald Trump won the U.S. presidential election late last year. While healthcare-related stories continue to dominate headlines and tend to frighten new investors away, the underlying trends in the sector continue to show strength, and many active traders are actually looking for opportunities to buy. In this article, we take a look at the charts and try to determine exactly how traders will be looking to profit from a resumption of the dominant uptrend over the weeks and months ahead. (For more, see: Investing in the Healthcare Sector.)
Many active traders turn to sector-related exchange-traded funds (ETFs) when analyzing the broad markets and looking for pockets of strength. XLV is one of the most popular funds used for this task as it relates to healthcare. Taking a look at the chart below, you can see that the sector is trading within a defined uptrend. This chart is particularly interesting to those who follow technical analysis because the 50-day moving average (blue line) has propped up the price consistently since the spring of 2017. Using past price action as a predictor of the future, traders would expect future pullbacks to find support near the dotted trendline, and most would look to buy in order to capture a lucrative risk-to-reward ratio. Based on this chart, we would expect technical traders to set their stop-loss orders below $78.00 in case of a sudden pullback or shift in fundamentals. (For further reading, check out: 3 Sectors to Watch in 2017.)
One common strategy for discovering high-quality companies to invest in is to investigate the top holdings of major sector-related ETFs. In the case of XLV, Johnson & Johnson is the top holding with a weighting of 11.61%. Taking a look at the chart below, you'll see that the price is testing the combined support of the dotted trendline and the 50-day moving average. Like the chart of XLV, these two levels have provided support before, which active traders would expect to be the case again. It would not be surprising to see traders open buy orders near current levels and set a stop-loss below $131.46 in case the recent weakness continues. (For further reading, check out: Invest in Healthcare Providers With This ETF.)
When it comes to investing in the healthcare sector, Pfizer needs little introduction. With a market capitalization of nearly $200 billion, there are few companies on the planet with the breadth of operations or the pipeline of Pfizer. With a weighting of 6.44% of the XLV fund, Pfizer is considered a major holding, and based on the nearby support shown on the chart below, it appears as though there is plenty of upside remaining. Active traders will likely look to place buy orders as close to the support levels as possible and then protect them by placing stop-loss orders below the major support of the 200-day moving average at $32.51. (For more, see: Pfizer Downgraded on Patent Expiration for Viagra: Credit Suisse.)
The Bottom Line
Investing in the healthcare sector tends to fall out of favor because of negative press and the political hotbed that it has become. However, from the perspective of an active trader, nearby support suggests that current levels present an intriguing risk/reward and that it could be a good time to buy. (For more, see: Top 3 Healthcare ETFs for 2017.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.