The healthcare sector dropped 1.99% on Monday after a US District Court judge in Texas ruled that Obamacare was unconstitutional since Congress repealed the individual care mandate. Markets took it as a signal that healthcare providers could be in line to lose a considerable chunk of business.
However, many are skeptical of the decision, questioning its merit. BMO Capital's healthcare analyst Matt Borsch believes there will be an appeal on the ruling within a year. He considers the current brouhaha a buying opportunity.
Indeed it may be. Shares of healthcare insurer Cigna (NYSE:CI) were down 3.3% and US hospital manager HCA Holdings (NYSE:HCA) was down almost 3%. Molina Healthcare (NYSE:MOH) which works with state agencies to help manage Medicaid programs plunged as much as much as 16% intraday, but closed 8.9% lower.
While the 200 DMA supported Molina’s freefall and bounced it back above the November 20 trough, the damage may have already been done. Yesterday’s low created the second trough to complete a downtrend.
Even if there's an appeal on the ruling, and irrespective of whether it will happen in as little as 12 months, that's still a long time for investors to hold on to shares that were torpedoed by the ruling, especially when the broader market is already falling. For that reason we predict prices will keep falling. However, be cautious of the confluence of supports: the November 20, $114.44 low, which is a mighty hammer due to its small real body and exceptionally long lower shadow, as well as the 200 DMA.
Trading Strategies
Conservative traders might want to wait for a close below the 200 DMA; then, wait for a rebound to retest the 200 DMA from below, with at least one long, red candle, following a green or small candle of either color.
Moderate traders may wait to wait for a close below the Nov. 20, $114.44 low or at least the Nov. 19, $118.21 close.
Aggressive traders may short after a close below the $110.41 hammer low. Then, they may take a contrarian, long position, hoping for a bounce.
Aggressive Short Trade Sample:
- Entry: $120
- Stop-loss: $122
- Risk: $2
- Target: $112, above the 200 DMA
- Reward: $8
- Risk-Reward Ratio: 1:4
Aggressive Long Trade Sample:
- Entry: $112, above the 200 DMA
- Stop-loss: $110, below yesterday’s low
- Risk: $2
- Target: $118
- Reward: $6
- Risk-Reward Ratio: 1:3