3 Ways to Trade Strong Performance in Healthcare

by DarkoStojanovic from Pixabay

 

3 Ways to Trade Strong Performance in Healthcare

Over the past month, healthcare has been one of the top performing sectors. Healthcare is a big sector, and most of the industries within it can be traded via exchange-traded fund (ETF). With the strong recent performance, let’s look at potential buy locations in one well-known ETF and two that are not as well known.

The SPDR S&P Biotech ETF (XBI) is a popular healthcare ETF, with average volume of more than 4 million shares per day. In June, the price broke above an ascending channel, and it then came back to test that channel in August. After a major breakout, when the price comes back to test the prior pattern, it can often be a good entry point. That occurred near $76, and with the Sept. 6 close at $84.22, that buying opportunity has long passed.

However, another opportunity to buy on a pullback may not be far off. Going back to early 2016, rallies for XBI have typically advanced 14% to 24% before seeing a pullback. This rally off the August low is now within that range, meaning that the price could move a bit higher, but then a pullback of 6% to 10% is likely. The potential buy area on the pullback aligns with the trendline​ in play since the start of the year. If this trade setup develops, traders could place a target 5% above the most recent high (which is subject to change). (See also: Why the Biotech Rally Has More Room to Run.)

Technical chart showing the SPDR S&P Biotech ETF (XBI) in an uptrend but likely to pull back

The iShares U.S. Healthcare Providers ETF (IHF) is a less well-known ETF, trading only about 25,000 shares per day. It reached a new high in late July. The advance since late 2016 is composed of extended runs to the upside, interspersed with minor pullbacks. One of those minor pullbacks occurred in late July through mid-August, with the price dropping a bit more than 5% off the $150.75 high. The ETF consolidated through the end of August and then broke to the upside.

Near the breakout point of the consolidation – $145.50 to $146 – could be a good buy point. A stop-loss can be placed below $142 (or below $140 to give the trade a bit more room in case of a deeper pullback), with a target up near $162. The risk here is a deeper pullback of between 12% and 15%, like the one that occurred in late 2016. If that occurs, the above trade would be stopped out, but another buying opportunity would potentially occur between $132 and $128. (For more, see: The Vanguard Effect: Lower Prices, Higher Returns.)

Daily technical chart for the iShares U.S. Healthcare Providers ETF (IHF) in an uptrend

The iShares U.S. Medical Devices ETF (IHI) trades more than 130,000 shares per day and is in a long-term uptrend. After hitting a high of $169.80 in July, the price pulled back a touch more than 5%. While that is a relatively small pullback, it is the largest of 2017.

With the strength of the trend, trying to enter between $165 and $164 is warranted, as the price could run to $172 or $173 in the short term. That said, a pullback of 10% or more, like the one that occurred in late 2016, is inevitable at some point. Waiting for the deeper pullback could mean missing out on another run to the upside (in the short term), but entering here could mean being out of the money if the price does correct further. Those that prefer to wait could look to buy 10% to 12% off the high, which could align with the rising trendline extending back to 2016. (See also: Why This Healthcare ETF Is Surging.)

Technical chart showing the iShares U.S. Medical Devices ETF (IHI) in an uptrend with a trade opoortunity

The Bottom Line

These healthcare ETFs have been in strong uptrends, but that does not necessarily mean right now is the time to buy. Traders should consider where the ETF is trading within its trends and how much upside or downside there is based on tendencies.

The future won’t always align with historical tendencies, but those tendencies do provide a good context for the risk/reward of a trade. Traders should utilize stop-losses to help control risk in the event that the price keeps dropping after entry and risk only a small portion of account capital on any single trade. (For additional reading, check out: Why Healthcare Has Some of the Best Sector ETFs.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the ETFs mentioned.

 

Published at Thu, 07 Sep 2017 17:00:00 +0000

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