Health care providers quickly went from hero to zero in the fourth quarter of 2018 after a failed breakout and bearish momentum divergence, but we're beginning to see signs of a potential mean reversion over the short term.

Let's start with health care relative to the S&P 500 – represented by the Health Care Select Sector SPDR Fund (XLV) vs. the SPDR S&P 500 ETF (SPY) – which has been unable to find its footing since topping five months ago. Prices have now retraced 61.8% of their 2018 rally, which may offer some short-term support and transition the trend from down to sideways.

Chart showing the performance of the S&P 500 Healthcare Index vs. the S&P 500
All Star Charts/Optuma

[Learn more about analyzing trends and determining when a sector or subsector may be due for a reversal in my Technical Analysis course on the Investopedia Academy.]

The weakest subsector within health care has been health care providers, represented by the iShares U.S. Health Care Providers ETF (IHF). However, a ratio of IHF to XLV recently confirmed a bullish momentum divergence and failed breakdown by closing back above 1.85. As long as prices are above that level, our risk is well defined on the long side for a countertrend move back toward 2.00 to 2.04.

Chart showing the performance of health care providers vs. health care
All Star Charts/Optuma

There's a similar setup brewing in the ratio of this subsector versus the S&P 500, but it needs to close above 0.601 for confirmation. Similar to IHF/XLV, there's potential for a roughly 10% rally back toward its 200-day moving average if these conditions are confirmed by price.

Chart showing the performance of health care providers vs. the S&P 500
All Star Charts/Optuma

There's been no reason to bottom fish this subsector over the past five months, but these signs are suggesting that a mean reversion is likely in the near term. Our risk is well defined on the long side, and the reward/risk is skewed in our favor, so whether you trade these pairs directly or play the theme through individual names, it's worth paying attention.

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