In Healthcare, Focus on Supplies and Equipment; Avoid Providers

After slowly rolling over while inside the improving quadrant, the tail on XLV (Health Care) picked up again at the start of this week and is now moving into the leading quadrant.

This move follows the recent rotation on the daily RRG, which started out in the leading quadrant, rolled over and had a very short stint through weakening. It then rapidly returned back into the leading quadrant at a strong RRG-Heading.

This brings the weekly and the daily tails back in sync, while the sector is the strongest in terms of RS-Ratio on the daily time frame.

Inside Healthcare

Breaking down the Healthcare sector into industries shows an interesting picture, as you can see above. It depicts the Relative Rotation Graph for these industries against XLV as the benchmark.

First of all, the message for Health Care Providers is very clear: Avoid!

Looking at the other tails, we find $DJUSBT (Biotechnology) inside improving and almost crossing over into leading. However, the JdK RS-Momentum has already started to fade, which suggests that the rotation is losing power. $DJUSPR (Pharmaceuticals) is already rolling over inside improving and has started heading back towards the lagging quadrant.

The other two groups inside the improving quadrant; $DJUSAM (Medical Equipment) and $DJUSMS (Medical Supplies) are traveling at a strong RRG-Heading, which makes them the most interesting groups to focus on for the time being (from a TTH point of view, at least).

Medical Equipment

The Medical Equipment index is trending higher within the boundaries of a rising channel and currently testing the upper boundary. This could cause some short-term pressure in the near term. But dips towards the former breakout level around 2750 and/or the lower boundary of the channel are probably buying opportunities.

From a relative perspective, the RS-Line has just tested the rising trendline that is in play since the start of 2017, and both RRG-Lines are pointing higher, which should be strong enough to make this one of the leading groups in the Healthcare sector going forward.

Plotting the members of the Medical Equipment group on a Relative Rotation Graph against that $DJUSAM gives the picture above. Three tails seem to be offering good potential, as they are not too high on the RS-Ratio scale yet and are traveling at a positive RRG-Heading. These are ABMD, TMO and BIO.

Further investigation of the charts shows that ABMD is still trading more or less sideways on both price and relative charts, which makes it the least interesting stock of these three.

BIO (Bio-Rad Laboratories) broke above horizontal resistance on the price chart already a few weeks back, when the RS-Line bottomed against a rising support line that runs under the lows since 2019 and, shortly thereafter, took out the short-term falling resistance. With both RRG-Lines now above 100 and rising, BIO seems to be in good shape for a further rise. Dips back to the breakout area $650-675 are likely to be buying opportunities.

TMO (Thermos Fisher Scientific) is a little earlier in the process and is just breaking out from a broad sideways base that formed in the last twelve months between $435-$535. Such breaks are very interesting, as they give us the possibility to calculate a potential price target based on the height of the range. In this case, that means adding $100 on top of the breakout level, which leads to a target of $635, or around 19% from current levels.

The upward break in relative strength, which is pushing both RRG-Lines higher, is supporting such a move.

Medical Supplies

The Medical Supplies group broke higher last week and is following through nicely this week so far. The pattern looks like an ascending triangle, which is known as a trend-continuation pattern, and that makes total sense at this location and the prior uptrend.

Here also, dips back towards the breakout area look like good (re-)entry opportunities.

DXCM (Dexcom) broke away from a large triangle formation in June and has been on the run ever since. From a price point of view, it makes sense to not chase this move, but wait for a dip back towards the previous peak area around $450. The relative chart, however, is just breaking out and signaling the start of a new uptrend vs. the Medical Supplies index, which makes it a good stock to own for outperforming the medical supplies index and, therefore, the Healthcare sector!!.

ALGN very much follows the group index. A nice uptrend out of the 2020 low and then a consolidation in an ascending triangle that started at the start of this year and breaking higher last week. The big difference here is the relative strength vs. the group index. Here, we are seeing a similar break from an ascending triangle, which signals the continuation of the relative uptrend. On the RRG, that translates into a tail that just rotated through weakening and is now returning into the leading quadrant at a strong RRG-Heading.

With the industry group in good shape against XLV, both these stocks can be expected to pick up a leading role in the coming weeks.

#StaySafe, --Julius