, LLC, Investment Advisory Services, Cary, NC

Trading Big Breakouts on Healthcare Stocks

 In Chart Patterns, Hot Stocks, Swing Trading, Trend Trading


We have seen some big moves from healthcare stocks this week and I want to cover what a good healthcare trading opportunity looks like in a moment with an example.


But first I know everyone wants a ROKU update – the stock of the year.


We caught the 2 high tight flag breakouts early this year on ROKU before the stock soared 35% to 50% within a few weeks.  This time it was setting up a bullish cup with handle pattern ahead of its earnings.


In our strategies we find great stocks in strong, long-term uptrends breaking out of bullish technical patterns with a lot of volume.  Its critical the price reaches the entry point with a catalyst.


So we often jump in right after a great earnings report as the price is clearing key resistance levels.


Avoiding ROKU Below the Breakout Point


Unfortunately, ROKU did not have an improved outlook in the earnings report and the price did not reach the technical entry point in our alerts this time around.


Buying ahead of the entry point continues to be a suckers bet when trading this year as the earnings recession continues.  Most of the media is telling you that earnings are flattish to good but, make no mistake, earnings are down a lot outside of large caps.


For example, earnings are expected to be down over 22% for the small cap 600 index.  Meanwhile, earnings growth for the S&P 500 is expected to be about flat to slightly lower for the entire year.


Fortunately, next year the comps will get a bit easier for most companies.


For those who like intraday trading and reversal patterns on their favorite stocks here is a good example of a good reversal pattern on ROKU right after the earnings report.


A Bullish Intraday Pattern on ROKU


After a 10%+ move lower after hours, ROKU developed a bear flag pattern.  Soon after the market opened, many day traders shorted the break of the flag to the downside.



Bear Flag on ROKU



Unfortunately for the bears, the long-term trend is still higher for ROKU and this tends to lead to a lower win rate while shorting a large gap lower on a shorter time-frame.  Especially on a stock like ROKU.


One of the more bullish chart patterns is a busted bearish pattern.  A busted bearish pattern is one that develops, reaches the technical entry point (breakout to the downside in this case) and then comes back quickly to hit the technical stop on the short.


Another good entry point was when the price went above the 9 EMA on a 5 minute chart, pulled back to successfully test it with a strong reaction from buyers, then a break of that 5 minute candle on the very next candle.




A good exit strategy would be the first bearish candlestick pattern on a 5 minute chart and then sell the rest once it closes below the prior 5 minute candle on the next wave higher or the price reaches a key resistance.  Or, you could go for the all day trend higher by holding it until it closes below the 20 EMA and then breaks the low of the first candle that closes below the 20 EMA.


However, the win rate is not that great with these weaker day trading patterns.  You could trade 50 of these and not equal the profits made with one good high tight flag breakout on a daily time-frame that’s held for a up to a couple weeks or more.


Plus, these day trading opportunities are very time-consuming and take years to learn and master to get the necessary win rate along with good entries and exits.  Its a tougher game to win, especially on penny stocks where the win rates tend to be lower and where the risk is greater.


Swing trading tends to be much more profitable and less time-consuming for retail traders.


The best day trades are usually near a great technical entry for a swing trade.  So, a great intraday price pattern near the technical entry point on a great chart pattern on a daily chart.


Top Healthcare Stocks Breaking Out


This brings me to the aforementioned healthcare stock that set up nicely last week for a big short-term trade.  The stock was DXCM.


After a successful bearish head-and-shoulders pattern for the shorts early this year, DXCM set up another one over the past few months into its earnings release last week.


But then DXCM reported a blowout earnings beat and raise.  One of the key things we look for during earnings season.


It would have been nice to see DXCM reach the entry point on the head-and-shoulders but some were betting on a big move lower after the report as many companies are missing estimates and/or lowering guidance.


This helped to set up the explosive move after the big beat and raise as the shorts were now trapped.


The Best Healthcare Industry Stock News


DXCM more than tripled their expected earnings per share and beat on the top-line by nearly 15%.  Pretty impressive.


They raised guidance significantly even after backing out the big beat in Q3.


Those using our earnings eruptions strategy, were able to quickly find DXCM and qualify the long-term trend, earnings release and pre-market pattern.   They were all pointing to a likely big short-term trade brewing.


Another key bullish factor with DXCM was that the price was breaking into all-time highs.  I’m not sure why some traders dislike trading stocks on short-term time-frames breaking into all-time highs but to us this a bullish factor.


We want to see no overhead resistance.  Earlier in the week we saw CYBR barely meet the criteria in our earnings eruptions strategy but had the overhead resistance.  Even though it was entering into another historical price range, it moved sideways for over an hour before hitting a 2.5% stop.  Those using the late morning exit strategy got out with about a 1.5% loss.


Trading Stocks Breaking Key Resistance


Often times a stock will consolidate near a resistance area like this and then bust through it with the big catalyst and go much higher.  AAXN on Friday is a good example of this after a flat top breakout pre-market covered in another recent post.


Again, we only like the extreme flat top patterns and stocks that meet the qualifications in the earnings eruptions strategy.   The others just do not have the high enough win rate and enough upside to make it worth it to us given the time spent on each.


DXCM, on the other hand, had no overhead resistance and quickly surged 7% higher from the technical entry point within minutes.  We got in around $187 and took our final shares off near $200 within a few hours.


DXCM may also break out of an earnings flag in the days ahead.  If we get another decent catalyst, we will be playing that as well with a tight stop-loss.


As always, how this healthcare stock consolidates ahead of reaching the technical entry point in the bullish pattern is one of the things we look at ahead of the entry point.



Bullish Patterns We are Eyeing for Our Own Accounts



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