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Are Healthcare Stocks The Next Rotation Trade?

The recent melt up has been incredible, particularly in technology but could healthcare stocks become the next rotation trade? SPY and QQQ have had an amazing rally over the last 3 weeks, gaining 16% and 21% respectively. I warned on 4/21 that $510 SPY could be a buy level to look for and as soon as we got there, the market took off and has never looked back.


The main reason for the squeeze has been the slew of positive news in regards to trade policy which has forced dealers to rapidly cover their short hedges against the market's long put position. By in large the MAG 7 stocks were the most sensitive to trade implications and as such traders and institutions panicked in April and bought massive amounts of put protections on those names, mainly for the May expiry. Those positions have of course unraveled which has resulted in major tech leadership but that positive gamma will roll off with today's 5/16 expiry as dealers will no longer need to hold upside hedges against the insanely positive deltas. From a technical standpoint, we can also see that the /nq futures are now extended and into major long term resistance -


/nq into major resistance
/nq is into major resistance

/nq has had an incredible move but is now extended into a .786 retrace from the all time high as well as the underside of the bull market trendline that once broken, was the end of the rally earlier this year. We think that ultimately the index can make new highs but a pullback of some sort may be necessary in the meantime. Here's why I think the healthcare sector can benefit from a rotation trade -


It's hated and contrarian. XLV is now at a 24 year low vs. the S&P 500: https://x.com/Barchart/status/1922882174786670961

XLV divided by SPY is the lowest in 24 years
XLV divided by SPY is the lowest in 24 years

Stocks like UNH have been hit with an all out assault of negative headlines ranging from earnings disappointments, high profile murder, DOJ investigations, and CEO turmoil. The most recent was the DOJ lawsuit in regards to alleged Medicare fraud which caused another "baby out with the bath water" moment. That said, from a technical standpoint UNH is into nothing short of monster support and has reacted positively since testing.

Major long term support level for UNH
Major long term support level for UNH
Textbook reaction and bottoming tail on massive volume after tagging $250
Textbook reaction and bottoming tail on massive volume after tagging $250

From here we can see UNH has sold off straight into multi-factor support near the $250 handle. Factors include a horizontal support that was a prior breakout level and one that had never been back tested, a .618 Fib retrace from the Great Financial Crisis lows, and a multi year trendline that spans back to late 2014. As I type this UNH is trade at $290, up over 16% off of the low of $248 from yesterday and looks to be headed higher or at least supported based on the June expiry positions -

UNH has positive gamma and delta at 300 and above through the June expiry
UNH has positive gamma and delta at 300 and above through the June expiry

We can see on the chart above that both delta and gamma are positive at $300 and above for the June expiry, with deltas still mostly positive below despite a slightly negative gamma reading. If UNH can reclaim $300, it could really see upside hedging increase towards $350 and maybe even as high at $400 for the next month. In a more broader picture, let's look at XLV.

XLV has retraced to a "stacked fib"
XLV has retraced to a "stacked fib"

The chart here shows XLV retracing to what I call a "stacked fib" - a technique that can be found in the Essentials Course which is what happens when fib levels converge after being drawn on two different major pivots. In this case we have a dominant .382 retrace from the 2020 low and a more local (but still longstanding) .786 retrace from the 2022 low. On a more localized timeframe we also have the look of one of my favorite setups (Essentials Course - 2025 updates) the false breakdown, aka liquidity grab.

XLV showing a divergent RSI and failed breakdown attempt
XLV showing a divergent RSI and failed breakdown attempt

On the daily chart, buyers reaffirm the strength of the larger fib levels shown above by forcing a bear trap after the breakdown attempt earlier in the week. This chart pattern can lead to extremely powerful rallies and is a mainstay in my trading arsenal. Overall I'd favor the odds in that much of the negativity regarding Trump's policy shakeup as well as other freak outliers such as the case was with UNH, and even if tech remains strong we think this sector presents a solid, low-risk opportunity for longs into the next couple of weeks/months. 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/ 


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