Pfizer (NYSE:PFE) finds itself stuck in a downtrend and full of distribution. It’s the type of price action that tells bulls to head for the hills and bears to press their bets. If you’re not sure how to play it, then read on. Today’s article is all about how to capitalize on PFE stock in July.
The rollover in Pfizer has been unfortunate. It wasn’t all that long ago that the drug giant was keeping pace with its leading sector. Now, it’s a laggard in an otherwise middle-of-the-pack industry.
For context, let’s take an updated look at how the Health Sector SPDR (NYSERCA:XLV) has been faring. Remember, stocks tend to move sympathetically with their sector. Once you know the posture of XLV, you can spot which constituents are the leaders and which ones are falling behind.
From Leader to Laggard
As ugly as the March nosedive was in XLV, the damage in the S&P 500 was worse. You can see the outperformance in the Relative Strength indicator shown in the lower panel. There was a sharp uptick in the reading at the beginning of March that continued until May. Then, as if to let the rest of the market play catch-up, XLV paused. Strength gave way to weakness, and the fund broke its 50-day moving average.
Optimists will point out that we’re still above the horizontal support zone that has defined its three-month trading range. So there’s hope yet that the relative weakness won’t morph into a larger trend reversal.
To signal healthcare is back to bullish, I’m watching for a push above the $101.50 resistance area. Until then, I’m cautious on the sector.
Sellers Dominate PFE Stock
Even before March, the weekly trend for Pfizer was bearish. But there’s no doubt the global pandemic accelerated its demise. The V-shaped rebound off the lows was impressive, but it stopped short of turning the long-term trend higher. And now, with the past month of weakness, PFE stock is back to trending below all major moving averages. With it only halfway back down to March’s low, there’s more room to plumb the depths if sellers press their advantage.
The daily time frame has been ugly. June first’s down gap sparked the turnaround and it’s been nasty ever since. Bears have rejected every rally while chasing every support break. You can see their paw prints in the volume patterns.
This month has been littered with distribution days. These high volume selloffs suggest big traders are net sellers right now. Until that changes, it’s hard to trust rallies.
And PFE stock doesn’t just suck on an absolute basis. Its relative performance shows it falling well behind the healthcare sector. The following chart includes the Relative Strength indicator in the lower panel. Previously we looked at XLV versus the S&P 500. Here, we are specifically comparing PFE against its sector, not the broader market.
The line has been trending sharply lower since May, confirming that Pfizer is under-performing its sector.
When you add up the evidence, the takeaways are clear. First, don’t buy the stock. If you think this is ultimately a buying opportunity, then at least wait for the trend to turn higher after a resistance break. While you might have to purchase at higher prices, you’ll at least have the confirmation that bulls are taking control. Second, the trend favors bear trades.
As bearish as its price action has been, we still want to look for an entry point that offers low risk versus high reward. Entering after a multi-day rally is far better than chasing shorts following a six-day drop. If we’re lucky, today’s 1.6% gain will follow through and carry PFE stock back toward $34. At that point, the falling 20-day moving average comes into play.
I like using a trigger of a prior day’s low to signal the next downswing has begun. Buying August puts or put spreads is a simple way to play it. For the latter, I like the August $33/$30 bear put. It currently trades for $1.24 but will get cheaper if the rally continues.
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