BIOS Stock: Playing Offense With This Defensive Healthcare Stock
The markets are on the defensive as high-flying growth names like Facebook, Inc. (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX), and NVIDIA Corporation (NASDAQ:NVDA) have become inundated with selling pressure.
Money is rotating out of growth stocks like these ones and into defensive sectors like healthcare and consumer staples.
Rotation into defensive sectors usually occurs in the late innings of economic expansion, suggesting that the economy is starting to slow.
In this stock market environment, following the fund flows and getting defensive is the best course of action because it is true what they say: “A good defense is the best offense.”
I believe we have only seen the tip of this iceberg, and that stocks in these sectors will continue to attract fund flow.
Sticking with this theme of getting defensive, I like BioScrip Inc (NASDAQ:BIOS) in particular.
BioScrip is an independent provider of in-home healthcare solutions. Healthcare is a defensive sector that happens to attract fund flows in the late stages of an economic expansion. This is why it has not been a mere coincidence that BioScrip stock has been outperforming the major market indices in recent weeks.
The other (and main) reason I like BioScrip Inc is that there are a number of technical indications suggesting that BIOS stock is all set to embark on a trip toward higher prices.
The first indication that caught my eye is highlighted on the below chart:
Chart courtesy of StockCharts.com
The technical signal highlighted on the above BioScrip stock chart is created when the 50-week and 200-week moving averages cross.
There only two types of signals that can be generated: either the 50-week moving average crosses above the 200-week moving average or it crosses below that average.
For instance, in July 2014, the 50-week moving average crossed below the 200-week moving average. This phenomenon created a death cross pattern, suggesting that a bear market was in development.
True to a bear market’s nature, by December 2016, BioScrip stock had shed 86.9% of its value. This was a substantial loss, so it’s fair to say that calling this signal a death cross is a fair interpretation of what follows.
One of the reasons I currently like BIOS stock is that, in October of this year, the 50-week moving average crossed above the 200-week moving average. That created a signal known as a golden cross. This type of signal indicates that a bull market has already begun its development.
Another reason I like this stock is that it has just completed a technical price pattern that implies that higher stock prices are imminent.
The technical price pattern I am referring to is highlighted on the following chart:
Chart courtesy of StockCharts.com
The technical price pattern highlighted on the BIOS stock chart above is known as an ascending triangle. This price pattern is created when the price action is characterized by a static high that’s accompanied by a sequence of higher lows.
Connecting the peaks and troughs created by the price action is how I captured this price pattern. The end result of this process is two converging trend lines that depict a triangle. Those trend lines pinpoint the parameters of the pattern.
This information is of utmost importance because, in order to complete the pattern, BioScrip stock needed to exit it.
Before I move forward with the breakout, I need to explain why triangles are very special price patterns: they can build momentum as they develop.
This momentum will build until the pattern is completed. Once it reaches its peak, a powerful move is expected to follow, the magnitude of which is directly related to the size of the pattern.
On November 26, BIOS stock broke out of the ascending triangle, completing the pattern that has been in development for over two years. This suggests that a powerful move toward higher prices is underway.
This breakout in particular is special because, in the current market conditions, breakouts have been few and far between. That makes BIOS shares more attractive.
Now that a breakout has occurred, the completed pattern can be used to create a price objective for the move that is expected to follow.
This objective is obtained by taking the depth of the triangle and extrapolating that value above the significant level of price resistance that defined this pattern. Putting this method to work suggests that $5.80 is currently a plausible price objective.
I am bullish on BioScrip Inc because it has just completed a technical price pattern that implies that higher stock prices are now to be expected.
Right now, the only thing that would negate this bullish view is if the BIOS stock price falls back within the pattern.