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September 18, 2009
In my last article I noted that we could be approaching technical resistance in the S&P 500 and that I am paring back my long positions as individual charts begin to show weakness. Despite this, there are still some great looking long opportunities available. One of the best performing sectors in Australia has been the Healthcare Sector (XHJ:ASX). Over the last few weeks the sector has risen some 15% and the rapid ascent seems to be across most of its constituents, however within any sector there are always going to be relative laggards and leaders. This can lead to interesting investment opportunities. Look for the shares which have underperformed their sector and appraise them for any technical or fundamental reasons which may let them play "catch up".
Ansell is one such example. Typically considered to be solely in the domain of personal healthcare, Ansell is also a global manufacturer and marketer of natural and synthetic rubber latex surgical examination gloves as well as protective gloves and apparel for occupational healthcare. Certainly, the recent rebound in equity markets has improved demand for these products (especially in the automotive and catering industries). From its own fundamental information, the story is fairly bullish too.
Chart 1
Earnings per share are on the rise and the low dividend payout ratio of 31% would seem to reflect a company that believes a reinvestment of profits is a better way of rewarding share holders than distributing those profits. Not an investment for those seeking income (you can see the 3% yield), but possibly one for a growth investor.
Chart 2
From the perspective of an integrated trader like myself, the next stage is to regard the technicals. From the chart below it is quickly evident how Ansell has underperformed the healthcare sector. A recent CEO resignation notice may have knocked confidence to a degree, but a trader should look forward, rather than at the present. By extrapolating the chart's pattern, we can build a framework in order to do this.
Ansell's price action is well defined within a bullish support and return line. This channel also reflects a fractal Elliott Wave pattern. By changing the parameters of the Elliott Wave algorithm used in ProfitSource to 90 bars, it is easy to see how this is formed, and indeed, how an entry point can be determined from the EBOT. With a $10.80 price target given by both the TAPP, the Range Projector AND the channel, it seems that probability is in favour of a rally. There is a potential $1.30 profit; however risk needs to be considered. Relative to the 40 cent loss dictated by a technically placed stop, the reward versus risk comes in favourably compared to an acceptable 3:1 ratio.
Chart 3
click here to enlarge
Whether or not this trade works out or not is, by and large irrelevant. What is important is that the analysis puts confidence in the position and the trading plan puts risk at the minimum.
Stay Sharp,
John Jeffery
Trading Tutors Team
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