Wealth Within- What sector is important for your portfolio?

By Janine Cox Wealth Within

In my previous blog post I discussed the Healthcare sector, in particular, I talked about company fundamentals, including the dividends paid by the bigger healthcare companies. However, a review of the Healthcare sector would not be complete without considering the technical side, or what the price charts show is probable for the share price.

Knowing how to read a price chart, means applying price, time and pattern analysis to determine what the most likely future scenario is. I remember the first time I saw how this works, I was amazed that this was even possible, and wondered why I was not taught this at school. But then of course, schools are designed to get people into jobs, not to teach you how to become financially independent!

Some of you may already hold health stocks directly in your portfolio, or indirectly through your super fund so it’s a good idea to know what the sector is doing at all times.

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CSL Limited (CSL)

The first stock on the list was CSL, the healthcare sector heavy weight. A price chart of the healthcare sector appears very similar to the price chart of CSL. This is because the weighting of CSL in the sector, or its market capitalisation, being the value of the company, is so much larger than the other stocks in the sector and therefore, when the price chart is created for the sector the impact of CSL’s price activity dominates.

Longer term, we always start a review of a stock by looking at the monthly chart. Considering this, the monthly chart shows how CSL surprised on the upside recently, breaking well above the previous high in March 2014. The big driver for the strong rise was a company announcement during reporting season. The market liked the news and responded, pushing the price up quickly. The rising USD, or lower AUD, is also providing support for the share price.

What is very interesting about the chart is how this rise created a very long bar for the month of August, eclipsing other months and breaking clear of what was largely a sideways move in price, which had persisted since around July last year. Prior to the announcement, the value of the stock traded up and down, in a zig zag formation and had rolled over. This shows how one announcement can make a big difference.

Did you know that CSL has in the past traded through $100? In 2007, CSL traded to $109.81, however, this triggered the company to split the number of shares on issue because of concern that $100 was psychologically all the market would pay. Put simply, the company believed that the market was more likely to buy a share worth $30 than one at $100. So, with shareholder approval, the company split the shares by a third. Now this doesn’t mean your holding would be less if you had the stock at the time, as in splitting the shares the company increased the number of shares on issue. Therefore, effectively the value of a parcel of your shares was the same, only you held more shares at a lower price.

Today the stock is fast approaching that $100 barrier again and it’s not impossible for CSL to again achieve this price, and I see this as likely within the coming two years. In the short term, with some ups and downs along the way, CSL may go on to achieve around $80 to $90 before the next significant turn.

Remember, as an analyst, when looking at a stock it is important that you look at both the upside and the downside, so that you remain flexible in your view as the stock unfolds. Therefore, on the downside, if the share price was to fall from here, there is strong support between $64 and $68, however, if this zone was ever broken CSL would be likely to experience a much greater fall.

Ramsay Health Care Limited (RHC)

This stock has been incredible in terms of the way it has traded, in that it just keeps reaching for blue sky. The original analysis suggested that the rise would top long before now, and therefore, the current rise is becoming quite extended. The current target is at around $57.00 to $58.00. On the downside, if the stock were to fall away, there is short term support between $44.00 and $48.00. A fall below the upper level of this range would increase the risk of a much larger decline.

Sonic Healthcare Limited (SHL)

Unlike CSL and RHC, SHL has been challenging the prior all-time high price at $18.00 in October 2007, and only managed to break through this month. Back in August, SHL provided an update to the market and around that time the share price had poked above this level, but following the announcement it fell away under some selling pressure. Part of the reason for this was that the market did not like the company’s financial update. At the time, I suggested that it was best to watch the share price to give a truer indication of how serious the news was.

As SHL was struggling to get above the prior all-time high there is still a real possibility that it could fall from here if it were to break strongly back below $17.00. However, this seems less likely now given how price has moved higher. That said, the weekly chart shows a gap in price after week ending 17 October, and stocks tend to fill gaps. SHL has the potential over the coming months to achieve around $20.00 to $22.50.

Cochlear Limited (COH)

COH is also very interesting and higher risk from a trading perspective, given the high level of volatility we see at times in the share price. The long term chart shows a head and shoulders pattern formation, which is generally bearish however, given the recent strong rise the stock may attempt to again challenge resistance at around $80.00. If you have been working through the Diploma course you may have learnt all about these patterns in module 5.

I note that the strong rise in August was around positive news during reporting season that was well received by the market. Prior to this rise occurring, given the before mentioned pattern and other resistance levels, it was more likely to fall than rise, however, now the pendulum has swung the other way. This reminds me of what the famous trader called Gann once said, that when a stock attempts to break through a level for the fourth time it will usually go through. Of course, this doesn’t mean COH will, however the recent strong rise increases the probability for this to occur. Remember, this is not a stock for the fainthearted.

Primary Health Care Limited (PRY)

Interestingly, PRY has been trading sideways and down since about February 2013, which isn’t great if you own the shares. However, as some compensation to ‘buy and holders’, it does pay a reasonable dividend. Technically, you ought to have seen the writing on the wall to exit long ago, or various rules to exit since the February high. Just prior to reporting season it appeared as though PRY might break to the upside of this sideways move, however, it has a number of times fallen away, and quite strongly on negative news.

I had said that as part of the recent decline, if PRY were to fall below the $4.40 level it was likely to continue the current decline, which it did, finally stopping at around $4.09 earlier in October. Currently, the stock appears to have found support between $4.10 and $4.30, however, PRY could come back to test this level to confirm the recent low at some point. There is a gap in price on the daily chart at around $4.80 and it currently appears as though the stock may rise to fill this as part of a recovery. I note however, $4.80 to $5.00 represents some resistance for the rise.

Looking at the upside, when this move is complete and the share price finds solid buying support again, it has the potential to rise to around $5.50 and $7.00.

Resmed Inc (RMD)

RMD is one of the most fascinating health stocks on the market from a technical perspective. Only since around early 2012 has it broken free from one of the largest zig-zag formations I have ever seen on a stock, which increases its potential longer term.

RMD’s sleep apnoea devices are changing lives and helping a lot of people, however, earnings will be impacted by increasing competition internationally, however, with a very strong R&D side RMD continues to make its products very relevant for the market. A falling AUD is also providing support for the share price.

RMD has been trading in a medium term sideways trend, however, I have been waiting for one further strong rise over the coming months which will see it break to a new all-time highs. The stock has the potential to trade to around $7.00. On the downside, if the share price came back strongly below $4.70, or even $5.00, it is likely to continue to fall. That said, right now it looks good.

Janine Cox

Wealth Within

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