Another Look At Healthcare & Defense Sectors

PICTURED BELOW: The Healthcare ($HMO +0.06%) index slammed into resistance again on Tuesday, shown above as the upper boundary of its base. Until this index trades above resistance, odds favor this trading range will continue.

TOP RATED HEALTHCARE STOCKS from March 15th


Tuesday''s Top Biotech & Medical Stocks

PICTURED BELOW: The defense sector is another area that has a compelling technical picture. Note the long series of higher highs and lows in this weekly chart of the PHLX Defense Sector Index ($DFX).

The April peak at 320 was finally breached in late 2006. The recent pullback to this key breakout level established 320 as current support. The "prior resistance becomes current support" concept is well known among traders. I call the breakout level the "missed opportunity" level because it reminds me of the underlying dynamics of the price pattern. Those who missed the opportunity to buy on the original breakout will not make the same mistake again. They see any pullback as a second opportunity to buy. Their buying creates current support at the level that had previously held the stock down.

Those who sold in late 2006 under the mistaken belief that they were selling at the top are now regretting their decision. The recent pullback gave them a chance to redeem themselves, so they bought where they previously sold. The recent bounce off 320 sets up a test of the next "missed opportunity" level: the recent high of 340. Some traders will likely regret not selling when the DFX peaked in February, and some will welcome a second chance to sell. If sufficient demand exists at 340 to absorb this selling, the uptrend should remain intact.

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