Health Insurance Carriers Headed for New Highs

Buyers scooped up shares of health insurance giants after a trio of major reports this week, continuing bull market runs that will soon stretch into their second decades. The dismantling of the Affordable Care Act (ACA), also known as Obamacare, and a deregulatory wave across affected states is underpinning profits, while the domestic focus of the health insurance companies is offering safe haven against trade war headwinds. (See also: Investing in Health Insurance Companies.)

Humana Inc. (HUM) beat second quarter profit expectations by 18 cents while guiding fiscal year 2018 above consensus. The news triggered a quick rally to an all-time high at $327.44, followed by an inside day that bodes well for further gains in coming weeks. Humana has competed with Dow component UnitedHealth Group Incorporated (UNH) for industry leadership in recent years, matching rally leg for rally leg.

Humana stock topped out near $220 in 2015 and entered a rounded correction that found support at $150 in July 2016. It returned to resistance in March 2017 and completed a cup and handle breakout two months later. Channeled price action since that time signals heavy institutional interest, confirmed by a rocketing on-balance volume (OBV) indicator that is posting an endless series of new highs.

Channel resistance is currently situated near $335, which computes to less than 10 points of upside before the next orderly pullback. Deep support lies at $280, perfectly aligned with the 200-day exponential moving average (EMA). Declines haven't reached that low in 2018, suggesting a low-risk buying opportunity when the stock tags the 50-day EMA, currently rising from $307. Given channel boundaries, this pattern works best for long-term positions and investors in no hurry to take profits. (For more, see: Health Insurance: New Front in Walmart vs. Amazon?)

Aetna Inc. (AET) beat second quarter profit estimates by 39 cents while reporting in-line revenues. It didn't comment on forward guidance, with CVS Health Corporation (CVS) now seeking to buy the company for $145 per share in cash and .8378 CVS shares. The merger news has been mixed so far, with a recent report that the California Insurance Commissioner has urged the Justice Department to block the deal.

Aetna stock topped out at $134.40 in July 2015 and turned lower, carving a broad sideways pattern with support in the mid-$90s. It turned higher following the 2016 presidential election and completed a round trip to the prior high in December. A May 2017 cup and handle breakout triggered a strong rally wave that added nearly 50 points into January 2018's all-time high at $194.40.

The shares pulled back to the 200-day EMA in April 2018 and completed a double bottom reversal six weeks later, returning to the first quarter high in July. Sideways action since that time could complete a breakout or topping pattern, but betting on a breakout makes sense given sector strength. However, its accumulation pattern is weaker than its peers, raising a red flag about buying interest. (For more, see: CVS-Aetna Deal Prompted by Amazon's Drug Moves.)

Cigna Corporation (CI) beat second quarter earnings estimates by 59 cents while reporting in-line revenues. It also raised fiscal year guidance by a wide margin and now expects revenue growth around 8%. The company is seeking to buy Express Scripts Holding Company (ESRX) in a deal that it hopes to close by Dec. 31. However, it's reported that Carl Icahn has built a large stake and is planning to vote against the merger.

Cigna stock topped out at $170.68 in June 2015 and sold off in a volatile correction that bottomed out at $115 in November 2016. It returned to resistance in May 2017 and broke out immediately, entering a trend advance that posted an all-time high at $227.13 in January 2018. It turned lower with the broad market into February and fell through the 200-day EMA in March, following the Express Scripts news.

A four-month basing pattern yielded an impressive breakout following this week's earnings report, with the carrier remounting the broken moving average on strong volume. It is now filling the March gap between $182 and $192 and is likely to pause at the top of the big hole. A breakout above that level should offer a secondary buying signal for investors and market timers willing to sit through deal whipsaws. (See also: Icahn to Block $54B Cigna-Express Scripts Merger.) 

The Bottom Line

Health insurance carriers are acting well following a trio of sector reports, with Aetna and Cigna carving the most constructive price patterns. (For additional reading, check out: What Is Trump's New Short-Term Health Insurance Order?)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication. >

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