Healthcare systems company UnitedHealth (UNH) beat second-quarter expectations Thursday before the bell, spurring UNH shares to an all-time high on the day. But the move has made UNH stock dangerously overbought in the near and long term — active investors should look for short-side opportunities.
On the multiyear weekly chart stretching back to 2009, note that the stock has ascended in an orderly channel the entire time. More important, UNH stock has traded in a tighter range (blue box) at the upper end of the multiyear channel for the past 11 months, which ultimately led to yesterday’s move that pushed UNH stock out of the channel to the upside. Simply put, through a multiyear lens the stock here is overbought and risk-reward on the long side is increasingly weak. Eventually UNH stock stands a good chance of mean-reverting back into the multiyear channel.
On the daily chart, note the shooting star candle that UNH stock left behind on Thursday as the stock closed about 2.50% off the intraday highs. This bearish reversal speaks to the bulls having run out of steam, which is further illustrated by the negative divergence from the Stochastic momentum indicator. Note that while price continued to ascend in recent days, momentum peaked last week and has since made lower highs. Usually momentum in a case like this is a leading indicator.
While longer-term investors will likely ultimately find better long-side entry points in UNH stock in coming months, the more active investor and trader can consider leaning short the stock, against Thursday’s intraday highs. More conservative traders may want to wait for a confirmation selling day before going short the stock. UNH stock can easily mean-revert back into the high $70s in coming weeks or months.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.