Managing Editor’s Note: Today, we’re hearing from our contributing editor, Mike Burnick, in his weekly Thursday feature.
Mike brings 30 plus years of hands-on market experience — from trading floors and research desks to running his own mutual fund as a registered investment advisor — and now leads multiple TradeSmith advisories including Constant Cash Flow, Infinite Income Loop, and Inside TradeSmith.
And he zeroes in on the beaten-down healthcare sector, explaining why its prolonged weakness may have quietly set up one of the more compelling low-risk, high-reward trade opportunities in the market right now.
Now, here’s Mike…
This Oversold Sector Has a Prescription for Profits
Healthcare stocks were out of favor long before the recent market pullback.
But now the sector is oversold, sitting at a strong technical support level, and my favorite momentum indicators are signaling an upturn.
And you can add a convenient upside catalyst … healthcare is in a seasonal sweet spot for a new uptrend.
These are two of my favorite technical indicators I use to identify oversold markets or assets that are poised for a rebound:
- The Relative Strength Index (RSI)…
- And Stochastic RSI.
I use these two powerful technical indicators in combination.
The Relative Strength Index (RSI) is a momentum indicator used to identify overbought and oversold conditions in stocks or other assets.
An RSI reading above 70 is considered overbought and may signal an upcoming downward reversal. But an RSI value below 30 signals oversold and can anticipate an upside reversal.
Meanwhile, Stochastic RSI simply measures where the current RSI value lies within its recent high-low range. In other words, it can smooth out RSI movements, often showing clearer turning points on a chart.
And right now, the S&P 500 Healthcare Sector ETF (XLV) has a double-barreled buy signal with both RSI and Stochastic RSI anticipating a new uptrend.
In this TradeSmith technical chart above I’ve added the RSI and Stochastic RSI indicators at bottom.
Simply click on the Indicators tab and scroll down to dozens of technical studies you can add.
You can see above that RSI is oversold, with a reading under 27. And Stochastic RSI is about to turn up from a very low level near zero.
That tells me XLV is extremely oversold, like a rubber band stretched to its limits, and the conditions are ripe for an upside reversal.
Also, shown on the price chart of XLV is our own TradeSmith Smart Moving Average (dotted line). This is our customized measure of any asset’s long-term trend.
In this case, XLV is in an uptrend and is resting right on this strong price support level.
Taken together, these indicators tell me that XLV is:
- Extremely oversold, and overdue for a bounce…
- And sitting at strong, long-term uptrend support.
That is the definition of a low-risk, high reward opportunity.
And this is exactly the type of setup Jeff Clark finds for his readers in Jeff Clark Trader every month – oversold conditions, clear technical signals, and a defined risk. Click here to see his next big trade.
Plus, according to our TradeSmith Seasonality tools, there’s an upside catalyst poised to launch XLV into a new uptrend.
Our TradeSmith Seasonality indicators are based on years of consistent cyclical trends in assets.
Right now, it shows a bullish seasonal trend for XLV from March 24 to May 16. Historically, XLV has moved up 74.1% of the time during this period, producing an average return of 3.61%.
That may not sound like much, but if you invested only during this period over the past 28 years, you’d earn 24.9% annualized gains!
This is a low-risk, high potential reward trade setup that appeals to me.
You could buy XLV right here at about $145 and place a stop just below the Smart Moving Average near $144, taking only a dollar or so of risk.
Then, wait patiently for the seasonal uptrend to unfold for a potential rebound up toward a neutral price level of $155 – a gain of nearly 7%, or perhaps even more.
Good investing,
Mike Burnick
Contributing Editor, Market Minute