2 Bottoming Stocks in Top Sector

01/16/2013 10:40 am EST


Thomas Aspray

, Professional Trader & Analyst

These two health-care stocks not only have room to run if the sector continues to rise, but the youth of their rallies means that they may be better able to withstand a near-term correction, writes MoneyShow's Tom Aspray.

Though the tech-heavy Nasdaq-100 remains under pressure, so far the selling in the broader S&P 500 has been well absorbed. Once again, the stock index futures are lower in early trading, but are holding above initial support.

The markets are nervously waiting for earnings from financial giants JPMorgan Chase (JPM) and Goldman Sachs (GS), which will be released before the opening. The new all-time highs for the Dow Jones Transports and the S&P Health Care Sector are a positive for the overall market. Health care surpassed 12-year resistance in 2012.

The positive intermediate signals for the stock market do not rule out a 2% to 3% pullback at any point, which could take the Spyder Trust (SPY) back toward its quarterly pivot at $142.64. Such a decline would also partially fill the gaps that were formed on the first trading day of 2013.

Despite the gains in many health-care stocks, there are still some that are just turning higher from support and are likely to hold up better if the market does correct. These two health-care stocks fit this criteria and are quite close to their buy levels.

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Chart Analysis: The Select Sector SPDR Health Care (XLV) is up well over 4% so far in 2013, after testing the weekly uptrend (line b) in late 2012. The October highs at $41.40 have been overcome.

  • The weekly Starc+ band is at $42.26, with the upper boundary of the trading channel at $43.80.
  • The weekly relative performance has turned up sharply after briefly dropping below its WMA.

  • The weekly OBV tested its uptrend (line e) in the middle of November.

  • The OBV is now close to overcoming resistance (line d) and making new highs.

  • There is minor support now at $40.75 to $41, with the quarterly pivot at $40.18.

The iShares Nasdaq Biotechnology Index (IBB) dropped to a low of $134.21 at the end of the year and has since surged 8.8%. The next resistance is at $148.54, which was the early October high.

  • The weekly Starc+ band is at $151.36, with the quarterly R1 resistance at $151.56.

  • The relative performance broke its short-term downtrend (line h) last week, and it is above its WMA.

  • The weekly RS line (not shown) did confirm the October highs and is back above its WMA.

  • The daily OBV broke its downtrend (line i) on January 4.

  • The rising 20-day EMA and first support (line f) is now in the $142 area.

  • The quarterly pivot is at $138.60, with the daily uptrend now at $137.

NEXT: The 2 Stocks to Consider |pagebreak|

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Wright Medical Group (WMGI) is an $845 million medical appliance and equipment company that dropped to a low of $18.88 in November.

  • WMGI gapped higher to start the New Year, indicating the correction was over.

  • There is further resistance at $22.59, which was the September high.

  • In September 2008, WMGI had a high of $33.26.

  • The relative performance has just moved above its WMA and looks ready to break out of its trading range (lines b and c).

  • Volume was strong yesterday, pushing the daily on-balance volume (OBV) back above its WMA.

  • A break of the downtrend (line d) would be a further positive signal.

  • The weekly OBV and RS line (not shown) are both above their WMAs.

  • Initial support sits at $20.97 and the quarterly pivot, with further in the $20 area.

Molina Healthcare (MOH) is a $1.28 billion provider of health-care plans that reached a high of $29.82 in the middle of December. The early 2012 high was $36.83.

  • The correction dropped MOH slightly below the 50% Fibonacci support at $25.76, with the 61.8% support at $24.70.

  • The daily relative performance confirmed the December high, and has now turned up from support (line e).

  • The daily RS line is now just above its WMA, but the weekly (not shown) is not.

  • The daily OBV also confirmed the rally in December, and its correction held above support (line f). The daily OBV is now back above its WMA, and the weekly (not shown) held above its WMA on the recent correction.

  • There is support at $26.50 to $27, with the quarterly pivot at $26.13.

What it Means: Though health care is just one of my five favorite sectors, it is the only one that is currently making all-time highs.

These two stocks look to be just completing their correction and offer reasonable risk opportunities. Focusing on risk and the entry level are two of the key rules that I think investors should concentrate on in 2013.

How to Profit: For Wright Medical Group (WMGI), go 50% long at $21.52 and 50% at $21.08, with a stop at $19.94 (risk of approx. 6.3%).

For Molina Healthcare (MOH), go 50% long at $27.10 and 50% at $26.62, with a stop at $25.37 (risk of approx. 5.5%).

Both orders were tweeted before the open on January 16.

Portfolio Update: On December 21, I recommended going 50% long iShares Nasdaq Biotechnology Index (IBB) at $132.12 and 50% long at $128.90, with a stop at $124.38. The buy level was just missed (the low was $134.21), so the order should now be cancelled.

NEXT: The Charts in Play Portfolio |pagebreak|

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