From the desk of Tom Bruni @BruniCharting
Healthcare Providers quickly went from hero to zero in Q4 of 2018 after a failed breakout and bearish momentum divergence, but we’re beginning to see signs of a potential mean-reversion over the short-term.
Let’s start with Healthcare relative to the S&P 500, which has been unable to find its footing since topping 5 months ago. Prices have now retraced 61.8% of their 2018 rally, which may offer some short-term support and transition the trend from down to sideways.
Click on chart to enlarge view.
The weakest subsector within Healthcare has been Healthcare Providers, but a ratio of the two recently confirmed a bullish momentum divergence and failed breakdown by closing back above 1.85. As long as prices are above that level, our risk is well-defined on the long side for a counter-trend move back toward 2.00-2.04.
There’s a similar setup brewing in the ratio of this subsector versus the S&P 500, but it needs to close above 0.601 for confirmation. Similar to IHF/XLV, there’s potential for a ~10% rally back toward its 200-day moving average if these conditions are confirmed by price.
There’s been no reason to bottom-fish this subsector over the last five months, but these signs are suggesting a mean-reversion is likely in the near-term. Our risk is well-defined on the long side and the reward/risk is skewed in our favor, so whether you trade these pairs directly or play the theme through individual names, it’s worth paying attention.