Double Top Spells Trouble for 3 Health Care Stocks

Health care topped sector performance in 2018, posting a healthy gain of 6.5%, while the broad market slipped 4.4% over the same period. Therefore, it's not surprising to see health care stocks underperform year to date (YTD) in 2019 as investors rotate into other sectors such as technology and industrials that were beaten down in 2018.

Last year's laggards continue to attract inflows, buoyed by the Federal Reserve indicating that it won't hike rates again in 2019 and hopes of a breakthrough in trade negotiations between Washington and Beijing. Better-than-expected economic data over the first quarter has also helped to quell recession fears.

"When the Fed shifted their stance in early January, it totally changed the backdrop. Investors sold health care stocks and started buying the most beat-up names," Walter Todd, chief investment officer at Greenwood Capital in South Carolina, told Reuters.

Federal government pressure to reduce the cost of prescription drugs in the leadup to the 2020 U.S. presidential election and proposals for a "Medicare for All" government-run health care system by Democratic lawmakers and presidential candidates have the potential to pose significant headwinds and increased volatility for this typically defensive sector.

From a technical standpoint, double top patterns on several large-cap health care stocks suggest that the sector may see further selling in the weeks and months ahead. Traders who want to position for falling prices may find these three short selling trade ideas of particular interest.

Eli Lilly and Company (LLY)

With a market capitalization of $116.46 billion, Eli Lilly and Company (LLY) specializes in neuroscience, endocrinology, oncology and immunology. Some of the pharmaceutical giant's drugs include Alimta for cancer, Forteo for osteoporosis and Humulin for diabetes. Analysts expect Eli Lilly to post first quarter earnings per share (EPS) of $1.20, which compares to $1.34 reported for the same quarter last year. The company lowered its full-year sales guidance in February and now expects revenues to come in between $25.1 billion and $25.6 billion in 2019, down from between $25.3 billion and $25.8 billion. Eli Lilly cited the failure of its cancer therapy drug Lartruvo and the pending acquisition of Loxo Oncology, Inc. (LOXO) for the downward revision. The company's shares pay a 1.99% dividend yield and have gained 4.22 % YTD as of April 17, 2019.

The Eli Lilly share price formed a textbook double top in March, indicating lower prices ahead. In a sign of waning momentum, the pattern's second peak made a higher high, while the relative strength index (RSI) indicator's second peak made a lower high – referred to as a bearish divergence. The double top confirmed Wednesday when the stock closed below the pattern's neckline. Traders who take a short position here should target an initial fall to the 200-day simple moving average (SMA) at the $110 level, with a potential move down to horizontal trendline support at $105. Place a stop-loss order slightly above the 50-day SMA to protect trading capital.

Hologic, Inc. (HOLX)

Hologic, Inc. (HOLX) focuses on women's health care needs and operates through five segments: breast health, diagnostics, surgical, medical aesthetics and skeletal health. Investment bank Morgan Stanley downgraded Hologic stock in January saying that the medical device maker's aesthetics division, created by the acquisition of Cynosure, has so far fallen short of estimates and has an unclear outlook. The bank subsequently lowered its 12-month stock price target from $44 to $39. Hologic stock has a market value of $13.34 billion and is up 11.41% on the year as of April 17, 2019.

A double top has formed on the Hologic chart between March and early April, with the pattern confirming in Wednesday's trading session when the price closed below the neckline. Once again, a bearish divergence has occurred between the price and RSI indicator over the past six weeks, forewarning further declines. Those who short sell should consider buying to cover between $42 and $42.50, where the stock may find support from a trendline stretching back over the past 12 months and the 200-day SMA. Place a stop above the April 12 high at $47.98.

Abbott Laboratories (ABT)

Abbott Laboratories (ABT) markets health care products globally. The company, which generates roughly 60% of its sales outside the United States, sells items such as pacemakers, implantable cardio defibrillators, neuromodulation devices, coronary stents, catheters and molecular diagnostic equipment. The Abbott Park, Illinois-based company reports first quarter earnings before the opening bell today, where analysts expect the medical equipment maker to announce EPS of 61 cents over the period – a 3.40% year-over-year increase. Trading at $76.38 with a market cap of $134.16 billion and issuing a 1.60% dividend yield, the stock has gained just over 8% YTD as of April 17, 2019.

Bearish divergence shows fading momentum in Abbott's share price also. Yesterday's close below the double top pattern's neckline strengthens the sellers' conviction. Think about setting a take-profit order at the $70 level, where the price encounters support from the 200-day SMA and a Sept. 23, 2018, gap that resulted from a positive clinical trial of MitraClip Percutaneous Therapy – a treatment for heart failure patients with mitral regurgitation. Manage risk by positioning a stop above the April 10 high at $79.10 and amending it to the breakeven point if price falls to the early December swing high at $74.