Dow component UnitedHealth Group Incorporated (UNH) rallied more than 5% at the start of Tuesday's session after the health care giant beat third quarter profit estimates by $0.12 and reported in-line revenues. The rally follows a month of lower prices, lifting UnitedHealth stock back to September resistance above $230. The round trip has done little to improve the deteriorating technical outlook despite the latest wave of euphoria.

The company raised 2019 earnings per share (EPS) guidance, capping off another profitable year, but it faces major challenge in the new decade. Democratic presidential candidates have called for "Medicare for All" and other radical changes to the private health care system, with proposals likely to keep pressure on the sector into the 2020 election. However, as President Obama discovered in his first term, it's nearly impossible to pass health care reform when America's noble senators and representatives depend heavily on industry donations.

Company executives thrust themselves into the reform debate in July, warning that a single-payer system would "destabilize the health care system." This self-serving commentary triggered an immediate industry downdraft, adding to losses that dropped UnitedHealth stock back to 2017 support levels near $200. This morning's positive action continues a two-week bounce, but tremendous buying power will be needed to lift the stock back into bull market mode.

UNH Long-Term Chart (1988 – 2019)

Long-term chart showing the share price performance of UnitedHealth Group Incorporated (UNH)
TradingView.com

A multi-year downtrend ended at a split-adjusted $0.08 in 1988, giving way to a steady uptrend that stalled above $8.50 in the first quarter of 1996. A 1998 rally attempt failed, adding to a trading range that finally broke to the upside in 2000. The subsequent advance ignored the dotcom bear market, posting healthy gains into the first quarter of 2006 before topping out in the mid-$60s.

That peak marked the highest high in the next six years, ahead of an orderly decline that accelerated during the 2008 economic collapse. Price action held above the 2000 breakout level at that time, setting the stage for a V-shaped recovery wave that completed a round trip into the 2006 high in 2012. The stock spent the next year completing the handle of a multi-year cup and handle pattern, breaking out in 2013 and entering the most prolific uptrend so far this century.

The stock posted an all-time high at $288 in December 2018 and sold off to $232 at year end. It broke the low in April 2019, exhibiting the first signs of relative weakness in years, and then posted a lower high just ahead of second quarter earnings in July. Weak price action since that time has taken a toll on the formerly bulletproof technical outlook, raising the odds that price action is grinding through a long-term top.

The monthly stochastics oscillator entered a sell cycle from the overbought zone at the start of 2018 and has carved a five-wave pattern (shaded area) that still hasn't reached the oversold zone. This is a highly bearish set-up, warning market players that the correction that started in December 2018 probably hasn't run its course. In turn, the pattern suggests that downside is likely to reach support at the 50-month exponential moving average (EMA), now rising from $200.

UNH Short-Term Chart (2017 – 2019)

Short-term chart showing the share price performance of UnitedHealth Group Incorporated (UNH)
TradingView.com

The sequence of highs since October 2017 completes a bearish head and shoulders pattern when taken together with horizontal support at $210. A rally above the mid-summer peak at $269 is now needed to overcome this technical barrier, while a decline through the neckline would set off major sell signals, predicting a trip below $150. The 50-month EMA just below support adds a wrinkle to this analysis, raising the possibility of a breakdown that turns into a bear trap.

The on-balance volume (OBV) accumulation-distribution indicator topped out one month ahead of price in November 2018 and matched that peak in the first quarter bounce. Aggressive sellers then took control, dropping OBV to an 18-month low in April, and it's now grinding lower once again. Tuesday's strong upside could affect this trajectory, but it is best to avoid buying the stock at this time. 

The Bottom Line

UnitedHealth Group stock is trading higher after a strong quarter and bullish guidance, but stiff headwinds into the 2020 presidential election warn prospective buyers to proceed with caution.

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