The heightened volatility leading into yesterday's U.S. election has put pressure on U.S. health care stocks, making it the worst-performing sector in the S&P 500 so far this year. While a clearer picture of what the future will look like for the sector will undoubtedly take months, based on the charts shown in the article below, it appears that traders steering clear of the sector and looking for buying opportunities elsewhere. We’ll take a closer look at the charts and try to determine if the market has overreacted or if the downward momentum is likely to continue. (For more, see: Why The Perfect Storm Is Brewing In Healthcare).

Health Care Select Sector SPDR Fund

One of the most popular exchange-traded funds used by retail investors for gaining exposure to healthcare related companies is the Health Care Select Sector SPDR Fund (XLV). For those unfamiliar, the fund is comprised of 61 holdings from industries such as pharmaceuticals, biotechnology, equipment and supplies as well as providers and services. The fund has total net assets of near $11.5 billion and carries a reasonable gross expense ratio of 0.14%. Taking a look at the chart below, you can see that the price is trading near a significant level of support/resistance. The recent increase in selling volume along with recent close below the dotted trendline and the 200-day moving average suggests that the bears are in control of the momentum. At this point, traders will continue to keep an eye on this chart because the 50-day moving average has started to trend downward and a cross below the 200-day moving average near $70.07 will likely signal the beginning of a long-term downtrend. (For more on this topic, check out: Top 5 Healthcare ETFs for 2016)

Pfizer, Inc.

A standard method for trading a move in health care stocks is to create a watchlist of names based on the top holdings of an ETF such as XLV. As you can see from the chart of Pfizer, Inc. (PFE) below, the recent weakness has pushed the price below the support of the 200-day moving average, which has resulted in an increased amount of selling pressure. Given the sharp decline in recent weeks has dragged the 50-day moving average lower and you’ll see that it is about to cross below the 200-day moving average, which will signal a long-term shift in the trend. Bearish traders will likely look to ride the momentum lower and protect their positions by placing a stop-loss order above the major resistance shown at $32.49. (For more, see: Understanding Pfizer's Capital Structure)

Amgen, Inc.

Another health care stock that has recently broken below a key level of support and appears to be headed lower is Amgen, Inc. (AMGN). As you can see from the weekly chart below, the price has recently crossed below a long-term trendline, which is a technical signal of an increased in selling pressure. The bearish crossover between the MACD and its signal line along with the state of the other indicators such as the RSI suggests that there is still room to move to the downside. Based on the chart, it appears that the bears will likely to maintain their positions until the price is able to climb back above the nearby resistance at $142.99. (For more, check out: Get Major Biotechs With BBH ETF)

The Bottom Line

Volatility surrounding the U.S. election has caused health care investors to become concerned about what the future outlook for the sector. Many have started to allocate capital to other areas of the market and the shift in the long-term uptrend is clearly evident on the charts shown above. At this stage, it wouldn’t be surprising to see health care bulls remain on the sidelines until the prices are able to trade back above their key levels of resistance. (For more, see: Support and Resistance Basics).

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.