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Trading the dogs 2016 into 2017

Last year the Australian healthcare sector returned -0.22% for the 12 months and the telecommunications sector was down 12% for the year.

Healthcare
Source: Bloomberg

Turnaround stories require some time to get the market’s attention. Here are a few observations based on pure market action that may give an early opportunity into a longer-term play. From a trading perspective, these can give high risk/reward outcomes as the stop loss* levels are very close to entry points, yet the upside can be very positive.

For this analysis, use the weekly time frame, as this goes someway in eliminating the dead cat bounce effect that follows large declining move often seen in shorter time frames.

*A stop loss would be taken on the break of the current support levels indicated.

Telecommunications

Telecommunications, the better of the two negative sectors down 12%, is only made up of four stocks. Spark Infrastructure (SPK) was the only positive result with a 5.8% gain. Vocus (VOC) was the largest draw in the sector at -47%, TPG Telecom (TPM) next with – 31% and Telstra (TLS) at - 9% for the year.

VOC

The Vocus weekly chart shows a significant relative strength swing by signal with the stock coming off support in a rounding base. The RSI swing buy signal last occurred in 2012 just prior to a four-year up trend to the May 2016 high. Currently, price is moving back into the capitulation move.

The TPG weekly view shows a similar rounding pattern to the previous chart of VOC. In the price base at a 2015 support level of $6.44, a buy hammer occurred which has through into a higher price, but has yet to trade over the short term resistance of $7.65. This weekly view also displays the RSI swing buy signal. This last occurred in January 2012.

TPG

The most heavily weighted stock in the telecommunications sector is Telstra. This also shows a recovery in price more advanced than VOC and TPM. You can see an inside week at the $4.70 low, also being a three and a half year low, followed by an inside period. Inside periods are often a reversal tool in larger time frames as this weekly chart shows.

The flowing price action back over the $4.90 support was retested in late December 2016 and the higher low (HL) has pushed prices past the $5.20. Short-term resistance followed this week with a retest of this $5.20 level. The primary trend in TLS has resumed to up.

TLS

Healthcare

The other sector producing negative returns for 2016 was healthcare. Often at the receiving end of government-funded cut backs and medical trial and drug testing failures, the sector can be highly volatile with several of the equities posting the largest losses for 2016. The sector is dominated by CSL, one of Australia’s largest companies, proving that even the largest players can turn in a negative year, down 4.6% for 2016.

With the year barely underway, healthcare is putting in the best returns. Sirtex (SRX) is the worst for 2016, gaining 12% for the start of 2017, followed by Ramsay (RHC) at +4.8%, Regis (REG) at +4% and CSL at +4%.

Sirtex could have been voted the biggest dog for 2016, down 64% for the year. From the market open this year, it is the best performer in the healthcare sector.

The weekly chart has the capitulation low from $26.95 to $12.20 in a week, a tough time for investors. The following weeks have been trading inside this range. What is important to see is the opening week marked an outside period (OP). This type of price movement with a higher high and a lower low than the previous week is often a marker (92%) for a market turn. The relative strength indicator has rounded up and is moving to the 30 level. No conclusive signal has been generated as yet.

SRT

The second dog is Estia Health (EHE). The weekly chart of Estia shows the capitulation low set in September 2016 with the following price action moving sideways. This highlights the fact that often stocks can take a long time to build a price base after significant retracements. The relative strength has produced a swing buy signal, however the price remains in a descending pattern for now. Worst case is if the stock breaks the $12.20 low as early bulls are knocked out.

EHE

It has been a great start for Regis, displaying the capitulation low during September 2016 has staged a significant recovery. This is confirmed with the RSI showing a swing buy signal late in 2016 which has followed through with a breakout over the $4.50 resistance level and away from the longer-term down trend line. In the short term, the relative strength has entered an over-bought  level above 70, this does not indicate a sell but rather a strength. Following such a strong move from the lows, a retest of the breakout level would make an excellent entry point.

REG

In early 2016, commodities were the dogs of the market, with many stocks in the sector making multi-year lows as commodity prices fell and demand waned. However, many of those stocks went on to be the best performers for 2016.

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