Healthcare: This Week's Sector to Watch
By James Hyerczyk
Commodity Trading Advisor
A ruling by the U.S. Supreme Court on the Obama health care law is due out this week. The judgment by the highest court in the land will determine whether the Affordable Care Act is constitutional. The decision to expand Medicaid coverage and require all U.S. citizens to carry health insurance is likely also to have an affect on the presidential election.
The announcement will also be a stock market catalyst. Its impact will be felt whether the Supreme Court completely approves or completely denies the plan or even if only parts of the plan are deemed constitutional. Most of all, the decision will lift a level of uncertainty that has plagued businesses and investors since Obama formulated his signature plan close to four years ago.
Despite the developing weakness in the overall stock market, the healthcare sector – pharmaceuticals, Medicaid providers/managed healthcare companies and hospitals could be big movers and buck the downtrend in the major indices taking place at this time.
Here is the technical outlook for a few of the healthcare ETFs and equity markets that could feel the impact of this week’s Supreme Court’s decision.
1. SPDR Healthcare Sector ETF (XLV)
Despite the downtrend on the weekly chart because of the overall weakness in the equity indices, the SPDR Healthcare Sector ETF (XLV) has made a strong recovery over the past three weeks, putting it in a position to turn the main trend back to up on a quick move through the pair of swing tops at $37.74 and $38.00.
The current top at $38.00 is slightly higher than the December 2007 top at $37.89. Although there wasn’t a strong follow-through when this top was exceeded in April 2012, the current position of the XLV has it poised for a solid breakout the second time around.
On the downside, negative news could weaken the ETF. The inability to take out $38.00 could mean that investors are reluctant to pay up for healthcare equities because of current market conditions. The key area to watch is $35.39 to $35.38.
A break through these levels will take out uptrending Gann angle support and a swing bottom, setting up the market for a potential acceleration down.
2. Merck & Co. Inc. (MRK)
Merck (MRK) is in a solid uptrend on the weekly chart. Despite weakness in the major indices, this stock found solid support at $36.91 in early March and again in late May when investors defended this bottom at $37.02. This double-bottom formed a launching pad that triggered a rally through a pair of tops at $39.43 and $39.50.
With the stock in a position to test the January 2010 top at $41.56, upside momentum generated by good news from the Supreme Court could push the stock to price levels not seen since March 2008.
3. HCA Holdings Inc. (HCA)
After plunging from a top at $33.31 in June 2011 to the bottom at $15.03 in August 2011, HCA Holdings (HCA) has recovered more than 50% of the break and is now trading on the bullish side of a major retracement zone. Additionally, the stock has recaptured an uptrending Gann angle at $26.53, providing further evidence that this market may be poised for further upside action.
The series of higher-tops and higher-bottoms on the weekly chart show a clearly defined uptrend. Standing in the way of the next surge to the upside is the April swing top at $28.17. A trade through this price could trigger an acceleration to the upside if coupled with bullish news from the Supreme Court. Before challenging the top at $33.11, the market will have to fill in the gap between $28.80 and $30.44.
On the downside, the first sign of weakness will be a failure to hold the uptrending Gann angle. This will be followed by a break back into the retracement zone. Finally, a trader through $24.09 will turn the main trend to down on the weekly chart.
4. Centene Corp. (CNC)
Recently, Centene Corp. (CNC) sold off sharply after revising its 2012 guidance to $1.45 from $1.65 per diluted share, from the previously announced range of $2.64 to $2.84 per diluted share. If you believe that this company can recover during the second half of the year then you have to determine the stock’s value zone.
The longer-term chart indicates that as many as three value zones have been created. They range from $25.00, $20.00 and $15.00. Rather than just step in and attempt to catch a falling knife, investors may want to wait for a support base to form before considering the long side.
While this stock may be attempting to re-establish support, investors should keep an eye on it as it may turn quickly to the upside. Based on the recent range of $50.98 to $24.26, the stock may recover 50% to $37.62. A trade through $37.74 will turn the main trend up on the weekly chart.
This stock should be on the watch list because the decision by the Supreme Court will have a major impact on Medicaid providers and managed health-care companies.
These are just a few of the healthcare markets to watch this week as investors wait for the decision from the Supreme Court regarding the constitutionality of Obamacare. Some stocks are in a position to breakout to the upside while others are still trying to find a bottom because of external factors.
The ETF market may be the best way to play the news since the impact of the Supreme Court’s decision is likely to be spread across many healthcare sub-sectors. Comparing the position of many healthcare stocks to the overall market, it looks as if the sector is in solid shape although a major sell-off in the major indices because of problems in Europe may dampen any upside movement.