The healthcare sector is leading the market higher today as stocks mount a rousing comeback. And though its percentage gain is slightly below energy, it has a much better-looking chart. I’ve scoured the space and found the top three healthcare stocks to buy.
To analyze the sector, I like to use the Health Care SPDR Fund (NYSE:XLV). It’s the most popular fund by a mile, with millions of shares traded daily. It also has great liquidity in its options contracts for those inclined to make a bet on the entire sector instead of individual companies.
My process for finding today’s selections was simple. I analyzed the price charts of XLV’s top ten holdings and identified those with the cleanest looking pullback patterns to support. Here are my three favorite healthcare stocks right now:
The lot of them all have low-risk entry points and are popping off support today to confirm the start of the next upswing. Let’s look at how to trade them.
3 Healthcare Stocks Popping Off Support: Eli Lilly (LLY)
Since the healthcare sector is full of uptrending stocks, I was able to be picky with which tickers I included in today’s gallery. My primary focus was finding which trends had increasing momentum during the last advance. After that, I looked at the structure of last week’s pullback to make sure there weren’t any signs of major distribution.
Eli Lilly scored high marks across all three signals and arguably had the cleanest bull retracement pattern coming into this week. Today’s 2.81% rally is launching LLY stock off of the rising 20-day moving average and acts as a clear signal that buyers are swarming.
With a run back to $165 likely, this healthcare stock looks like a great trading opportunity.
The Trade: Buy the June $160/$165 bull call spread for around $1.90.
The max loss is capped at the initial cost of $1.90 and will be forfeited if LLY sits below $160 at expiration. The max gain is limited to the spread width minus the net debit, or $3.10, and will be captured if the stock rallies north of $165.
Johnson & Johnson (JNJ)
Among healthcare stocks, Johnson & Johnson finds itself in a similar spot as LLY stock. The RSI indicator ramped to a higher high during JNJ’s April rally and confirmed the uptrend is increasing in strength. Last week’s much-needed retreat allowed the stock to work through overbought conditions and create a much more palatable entry. The cluster of bottoming tails in the last three candles showed bulls emerging to defend their turf at the 20-day moving average.
Volume during the recent drop was minimal, suggesting garden-variety profit-taking over trend-ending distribution.
Implied volatility is down at the 20th percentile of its one-year range. Anything in the lower quartile signals options are cheap and supports a long premium trade like calls or call spreads. Since JNJ is at $150, I’d opt for a bull call spread to better limit the cost. To provide more time for the stock to run to $160, let’s use July options.
The Trade: Buy the July $155/$160 bull call for around $1.64.
The max loss is $1.64, and the max gain is $3.36.
Abbott Laboratories (ABT)
Abbott Labs soared to a record high after last month’s earnings report gave investors something to cheer about. Since then, the healthcare stock has quietly retreated to its previous resistance area near $90. This testing of the breakout zone provides a perfect “buy the dip” set up as what was once a ceiling becomes a floor.
ABT stock isn’t wasting time this morning with a 3.10% gain that is powering it back above the 20-day moving average. Implied volatility has dropped enough to make call spreads once again interesting. Here’s the structure I would consider for a run back to $100.
The Trade: Buy the June $95/$100 bull call spread for around $1.60.
The max risk is $1.60, and the max gain is $3.40.
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