Shares of Tenet Healthcare (NYSE:THC) had a choppy year in 2019 thus far but rallied strongly in recent weeks. So strongly, in fact, that THC stock is now dangerously overbought in the near-term, offering opportunity to bears with a well-defined downside target.
Whether it is to my direct clients or in a more publicly available forum, I always want to ensure that I give adequate perspective in multiple time frames on any trading or investing ideas.
One of the main reasons market participants often have different opinions is merely because they have different time frames. Put differently, a stock may be bearish in the near-term but a wonderfully bullish setup in a longer time frame.
THC Stock Charts
To wit, looking at the multi-year chart of THC stock we see that the trend over the past five years has been lower. Moreover, during the past two years the stock has gyrated wildly but largely nowhere. At the same time, it is notable how the stock has carved out a series of lower highs since late 2018 and that with the latest rally it is getting close to making a first higher high. Thus, on this longer-term look THC stock may well be a good bullish setup.
But, just because we have a potentially bullish longer-term setup on our hands in Tenet Healthcare as per the above chart does not mean we have to buy the stock at any price. And while admittedly timing longer term entries is a challenging task, when a stock rallies almost vertically for several weeks in a row it does ultimately beg for some consolidation lower. This is where we switch our focus to the daily chart.
Here we see that in early October THC stock was around $20, and just a few weeks later is near $30. Indeed, that is nearly a 50% rally.
As a result the stock is now extended above its medium-term moving averages and momentum indicators are sky high. A mean-reversion move lower stands a good chance here.
Active investors and traders wanting to take advantage to fade this overbought condition could short THC stock in the $29-$30 area with a first downside target around $27. Any strong bullish reversal upon some consolidation in the stock from current levels would be a stop loss signal.
The highest probability trade, however, that sets up well for this position in Tenet Healthcare stock is to sell an out-of-the-money call spread (options credit spread) in a very specific way. I am hosting a special webinar Friday, Nov. 8 to go over this setup in detail. Register here.
Special free webinar: How to generate stock market income with options credit spreads like a pro. Register HERE
