Pharmaceutical companies have seen a surge in interest in 2020. While much of the focus has been given to those working on vaccines for COVID-19, based on the chart patterns discussed below, it appears that companies working on pharmaceutical products for unmet needs or other niche markets such as animal health could be worth a closer look.
SPDR S&P Pharmaceuticals ETF (XPH)
For many active traders, one of the best ways to gain exposure to complex sectors such as pharmaceuticals is by buying into popular exchange-traded products such as the SPDR S&P Pharmaceuticals ETF (XPH). Looking at the chart below, you can see that the price of the fund has been trading within a period of consolidation since it broke beyond the resistance of its 200-day moving average back in April. The defined range has acted as a strong guide for range-bound traders over the past several months, but the recent series of closes above $46 suggests that the next leg of the uptrend has started.
Followers of technical analysis will most likely enter buy orders as close to current levels as possible and place stop-loss orders below one of the nearby support levels, depending on risk tolerance and investment horizon. As conformation of a move higher, followers of technical analysis will also look to the recent crossover between the moving average convergence divergence (MACD) indicator and its signal line and maintain a bullish outlook until sell signals start to allude to a shift in underlying fundamentals.
Jazz Pharmaceuticals plc (JAZZ)
As one of the top holdings of the XPH ETF, Jazz Pharmaceuticals plc (JAZZ) could capture the attention of active traders over the weeks ahead. As you can see from the chart below, the price has moved higher in a step-like pattern since breaking above its 200-day moving average in August.
The upward momentum has resulted in a bullish crossover between the 50-day and 200-day moving averages, which is used by followers of technical analysis to mark the start of a long-term uptrend. Based on this pattern, traders will most likely buy near current levels and set their stops below one of the dotted trendlines or major moving averages in case of a sudden shift in sentiment.
Individual pharma stock investors face a difficult task in analysis due to the high level of technical expertise required to adequately evaluate the viability of potential new products as well as the continued prospects for existing drugs approved by the Food and Drug Administration (FDA).
Zoetis Inc. (ZTS)
As the top company for many active traders in the area of animal health, Zoetis Inc. (ZTS) has regained its primary uptrend and looks well positioned to make a continued move higher. As you can see below, the bulls have been in clear control of the momentum since they were able to push the price back above the 200-day moving average.
The bounce higher and strong support shown by the combination of the 50-day moving average and the ascending trendline are clear signals that the bulls are in control. More specifically, based on the clear impact that the support levels have on the price, traders will be looking to place their stop-loss orders below $160.29 or $139.60, depending on risk tolerance.
The Bottom Line
Big-name pharmaceutical companies have been in focus since the start of the pandemic, but based on the patterns discussed above, it appears as though the companies that cater to unmet needs or niche markets such as animal health could be worth a closer look over the weeks and months ahead.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.