Much talk has been made of late of a possible sector rotation taking place in a continuing bull market. This remains to be seen but if that is indeed what we are seeing it is wise to keep an eye out for stocks that are on the move or are ready to join in the advance. There are ten subsectors that comprise the group and a five of them are exhibiting the most strength, Diagnostic & Research, Major Drugs Manufacturers, Health Care Plans, Medical Instrument & Supplies and Medical Devices. Biotechnology stocks are also moving as they appear to be waking up from a two year slumber. Today however, we will take a look at the red headed step child of the group, Specialty & Generic Drugs. As we will see in the chart below, the sector topped out on 7/31/15 nearly two full years ago. Since then it endured a steep and steady downtrend but more recently has been working on an eight month bottom basing pattern that appears to be in the final phases and perhaps ready to break out and join in the healthcare rally. The sector has been littered with several troubled companies such as Valeant Pharmaceuticals but some of these companies could be on the road to recovery or perhaps some others in the group are ready to establish new leadership within. Here is a look at charts of the Healthcare sector as well as the Specialty & Generic sub-sector.
As much as we like to trend trade here, another valuable strategy we use is finding stocks/sectors in trend transition or reversal patterns after long periods of decline. If we can identify these stocks early within these sectors we may be able to ride them for large gains. So what does a trend reversal pattern look like. The following chart of MNK is a good example. The stock topped (not shown) on 3/31/2015 at $134.26 and has headed steadily south since before recently bottoming below $40 in June of this year. However, over the last four weeks it has rallied about 18% pushing through a downtrend line that dates back to late February. During this time the stock has found support along an uptrend line that has formed since the June low. The two most interesting things for us here are the initial strong push off the lows and the tight moving average crossovers (highlighted on the chart) of the 10 day MA, 20 day EMA and 30 day EMA as they move into proper bullish order meaning, the shorter moving average time frames are above the longer ones. Once we identify that, we wait for a pullback and then enter on a move once the uptrend reasserts itself. As for the case in MNK, we would possibly look to enter on a close above the $46 level. The MNK chart is just an example of the things we look when trying to identify trend reversals. We will talk about this pattern and identify more trade examples/opportunities like this going forward. In the meantime we will continue to comb through the sector and alert you to any possible trade ideas as they present themselves.