This Stock is Less Than $1 Away From a Sell Signal
Health care stocks have been on the skids since peaking this summer, with the Health Care Select Sector SPDR ETF (NYSE: XLV) 12% off its highs. But the selling doesn’t appear to be over just yet.
Medical equipment stocks were a bright spot, mostly trading sideways during the broader sector’s decline, until the Q3 earnings season took its toll.
For today’s trade, we’ll look at Baxter International (NYSE: BAX), which provides renal and hospital products and whose stock is teetering on the edge of a cliff.
Earnings for many of the larger medical equipment companies were fairly strong, and several even raised guidance. So, the fundamentals seem to warrant optimism, not pessimism, yet the market is singing a different tune.
The companies that beat estimates failed to make upside progress, and those that missed were punished with double-digit losses in a single day.
On Oct. 25, Baxter announced better-than-expected results before the open, and shares moved up more than 3% in premarket trading. Investors’ enthusiasm waned during regular trading hours, though. While the stock finished with a nice gain of 1.5%, it closed well off its highs of the day.
The next day saw renewed selling, and by lunchtime the entire earnings-related gain had been wiped out. As I often say, in technical analysis, bad action on good news is bearish.
The jump and subsequent decline following earnings resulted in a failed breakout attempt. When a stock moves above resistance and then closes back down below it right away, it’s a bearish signal that tells us the last buyers were met with a change in heart by the market.
Even before the failed earnings breakout, we got a sign that something was wrong.
Momentum indicators such as stochastics, shown at the bottom of the chart, already sported lower highs. When indicators and price action diverge — i.e., head in different directions — we usually see price change course to follow the indicator.
In this case, stochastics pointed to a slowing trend despite the stock’s continued advance — similar to the way a ball thrown up in the air will lose momentum before gravity stops its upward motion completely.
Money flow, which measures dollar volume changing hands on a trade-by-trade basis, also set a lower high in October, suggesting there was little buying enthusiasm for the shares ahead of earnings. So, following the post-earnings rally, BAX experienced a “sell on the news” event.
Finally, as mentioned above, the health care sector is doing quite poorly. The performance of any individual stock is greatly influenced by its sector, and health care has been one of the worst performers by a wide margin over the past few months.
Baxter closed marginally below its rising 2016 trendline on Tuesday and Wednesday and appears poised to break down in a more convincing manner. A break below $46.50 will be the signal to enter a short position.
Initial support is at the September low near $44.69. But since bearish pressure on medical equipment stocks is so great, this level is not likely to hold. The next stop should be a full 61.8% Fibonacci retracement of the 2016 rally at $40.21, which could land traders double-digit profits in just a few months.
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Recommended Trade Setup:
— Sell BAX short below $46.50
— Set stop-loss at $48
— Set initial price target at $40.21 for a potential 14% gain in eight week