Healthcare was the only sector that tagged a new high on Friday. Though sellers struck it down before the closing bell, the strength is a sign of its leadership and popularity among traders. And, it gives us all the reason needed to focus on healthcare stocks for bullish trade ideas.
If you’re a believer in the old charting adage that a trend in motion stays in motion, then you should look upon relative strength fondly. Sure, healthcare could always fall out of favor, but betting against the trend is a low-odds wager. It’s better to join the crowd and embrace the leadership. You can always purchase the entire basket via the Healthcare Sector ETF (NYSEARCA:XLV). Or, you can play individual names for a chance at bigger profits.
You may also like the pattern developing in a specific stock more than that playing out in XLV. I scanned the most liquid names in the sector, and here are my three favorites.
Let’s take a closer look at each chart and build out an options trade to bank on their next leg higher.
Healthcare Stocks to Buy: Pfizer (PFE)
Volatility seized Pfizer in the wake of last November’s novel coronavirus vaccine news, but the pharmaceutical giant has since settled down. In March, PFE stock found a bottom, and it’s been trending steadily higher ever since. It now has a three-month uptrend under its belt and sits nicely above the 200-day, 50-day, and 20-day moving averages. The 20-day, in particular, has provided support during the last few pullbacks.
Meanwhile, resistance near $40.40 is proving formidable. It rejected Friday’s rally attempt, making it the obvious line in the sand that needs to be taken out before entering aggressive directional plays.
Implied volatility is in the basement and suggests long premium plays are appealing. Given PFE stock’s cheaper price tag and its gradual uptrend, I like bull call diagonal spreads here.
The Trade: Buy the July $38 call while selling the 25 June $41 call for a net debit of around $1.90.
Eli Lilly (LLY)
Eli Lilly is well on its way to filling the major down gap from March 15. The recent high base breakout provided a great trading opportunity, so I’m not surprised to see the upside follow-through. It certainly helps that earnings came and went without disrupting the stock. And we’re sitting north of all major moving averages.
For the gap to fill, LLY stock still has another $6 of upside. Though, I think it’s got the juice to push back to its old resistance zone of $213, which puts the potential profit per share from here closer to $11. The point is there’s still room to run for those that missed last week’s breakout trade over $196.50. Couple that with the general leadership of the healthcare sector, and the case for adding exposure here is compelling.
The Trade: Buy the July $200/$210 bull call spread for $4.75.
Healthcare Stocks to Buy: Johnson & Johnson (JNJ)
The third and final pick for healthcare stocks to buy is JNJ. April’s earnings report jumpstarted its trend, and we’ve been pushing higher ever since. The posture of its moving averages echoes the healthcare sector, with the 20-day, 50-day, and 200-day readings stacked on top of each other. Over the past three weeks, an ascending triangle has formed.
Even though Friday’s breakout attempt failed, the pattern is still in play. Besides, I think the failed breakout bid can be blamed on a weak broad market that slid into the weekend.
Implied volatility is low enough to make bull call verticals interesting.
The Trade: Buy the August $170/$180 bull call for $3.95.
On the date of publication, Tyler Craig held a long position in KO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!
