XLV ETF – Is buying a healthcare ETF healthy for your portfolio

April 19, 2024No Comments


XLV ETF – Is buying a healthcare ETF healthy for your portfolio


I’m kind of an old dog in the game and I want to bring some of that ‘old dog knowledge’ to you via this show. Today’s a really short one because I want to talk about one chart – the US Healthcare Sector. Not specifically because I am recommending it or I think there’s anything special about it – but [00:01:00] what I’m seeing on the healthcare chart is a pattern that I’ve seen before.


Looking at the XLV ETF Chart

So, let’s treat today’s video as more of an educational video rather than a, “Hey, you should buy healthcare” or any other sector or stock. I’m using this as an example so you’ll understand how things happen sometimes on the markets, specifically after a long sideways base [00:01:30] breaks out. I’m going to share a screen and bring you directly to one chart on Stockcharts.com

So, this is the XLB, the Healthcare SPDR ETF. And as you can see, it was going sideways from the middle of ’21. So, there’s 2021. Closer to the left-hand side of the screen, there’s the middle. So, it was kind of trapped around [00:02:00] $135 or so, and it stayed there with lots of ups and downs. A great trading opportunity by the way – for people willing to move in and out of that ETF.

 XLV ETF chart

After it ran sideways, literally from mid-’21 right into the end of ’23, early in 2024 the XLV ETF broke out. [00:02:30] And this is interesting because there’s an old saying within technical analysis that goes, “The greater the space, (meaning the greater the long-term, sideways period), the greater the case.” So, in this case, the breakout should mean that there is a tonne of upside on XLV. And I am absolutely not here to tell you [00:03:00] that there is or there isn’t, but I do want to suggest that one factor on this chart is telling us that it may at least take a pause. So, let’s just examine a basic principle of technical analysis: sometimes after a breakout, a stock can get overbought and then it will correct. The extent of the correction – if it’s a healthy correction – is only back to the old breakout point. [00:03:32]

Now, I haven’t drawn any lines on this XLV EFT chart, but the old breakout point was around $137. And the stock right now is $143 but it has pulled back a bit from its high of around $147. So, there is a healthy possibility this breakout could retest the neckline, and pull back at or near the neckline. (The old resistance point on the long-term sideways period is called the ‘neckline’.) Now, this is not an absolute, it’s just a potential, but I’d give it a greater than 50% potential, especially with what I’m going to show you now. [00:04:17]  

So, what I want to show you next is an indicator called the ‘Money Flow Index’. Now, if you know anything about money flow, it’s the advancing days versus the declining days around a weekly chart – or in this case, advancing weeks versus declining weeks – and then applying the volume to that [00:04:42].  You start to get a picture of not just the money flow, but the momentum of the advanced volume decline. More importantly, it has an RSI-like formula [00:05:00] applied to money flow. 

So, instead of it just being a direct line, like the advance-decline line, it’s kind of an ever-moving line. This indicator is money flow like an A-D line, but with an oscillator applied to it very much like we do with price with straight RSI. So, this indicator actually is pretty good at picking peaks and troughs, and you can see that here, this lined up with a trough there. [00:05:30] Here it lined up with a peak. So it’s not an absolute, you don’t use it as your exclusive way of going in and out of the market. As you can see, lots of times it didn’t exactly pick those peaks and troughs, but sometimes the very, very strong moves are picked.


More on the XLV ETF Chart

[00:05:47] In this case, you can see that this XLV ETF went up quite a bit on a lot of volume, and it did get quite overbought on this RSI-like indicator. [00:06:00] In February we saw an overbought signal on the money flow index and that kind of lined up with this peak here. The next thing we saw, was a rounding over of the MACD, and today (April 9th), we are just seeing what’s called [00:06:30] an ‘MACD crossover’. [00:06:31] We had early warnings as it was rounding over, and you might remember that in some of my other videos I’ve talked about the MACD bars and the histogram. The histogram shows us that it was declining and giving us a little bit of warning that things were not only overbought but beginning to maybe round over.

[00:06:52] Finally, we will go to the RSI on price. RSI is a pretty good momentum indicator that can pick periods of peaks and troughs. And there we go. We went into an overbought signal and it’s done this before. In fact, you see a MACD crossover and overbought signal there [00:07:09], and an overbought money flow, and sure enough, it ended the uptrend and resulted in a small pullback. That was the same signal here [00:07:21], overbought money flow index, a MACD overbought and crossover, and the same thing with RSI, you got a pullback. [00:07:30] So, I think that this breakout is probably legitimate. I don’t think we’re going to go into a 2020 ‘COVID-type’ crash because that was an unusual situation, to begin with, but I do think that we had an overbought market that has a decent chance of returning – or at least getting close to – [00:08:00] the old breakout point, which lies somewhere around $137 or so. [00:08:05]


I like using round numbers, I like picking approximate points. So, if the indicators that we’ve just looked at are suggesting there’s a potential for pullback, we might see another $5 pullback, which is not a disaster, but what it does tell us if it finds support at or near $137 and then [00:08:30] starts to move up again, is that was a successful test and that the bull market is highly likely to continue for the healthcare sector. Should we see a successful test of somewhere near $137, I would use that as an opportunity to maybe add to positions or add a new position. You know, keeping in mind that if it ever does break that neckline [00:09:00] ever run $137 to the downside, that’s your stop-out point.

[00:09:03] So, you would sell it for maybe $2 or $3 below $137 if it failed. It’s a pretty cut-and-dry trade if it pulls back. All the indicators are suggesting it will so let’s see how close it gets to $137. Then, let’s see if $137 holds. And then maybe consider taking a position if it does hold with the idea that if it fails and it goes below $137, we’re going to cut our losses [00:09:30] and are not going to stay in the trade. But if it does hold $137, we might expect great things to come because again, that long-term, sideways period that you see on the chart that started late to mid-2021 indicates that there is tons of upside after a super-long consolidation period.

[00:10:00] I do hope that this lesson in this XLV ETF chart is applicable to other securities that you look at because we do get these occasional amazing-looking breakouts after long periods of basing or consolidation. And those breakouts 8/10 times are pretty good – very, very bullish. Sometimes they get a bit overbought and they can pull back, and so long [00:10:30] as the neckline isn’t broken from that original breakout, it could be an excellent buying opportunity. Again, a very logical plan of attack because you know if it breaks down below where you just bought, it’s probably a failed breakout. But we’re going to assume that this breakout is real, based on the length of it, and we’re going to assume it may pull back a little bit maybe to $137, and we’re going to hope that it can hold to $137 [00:11:00] so maybe we can have an opportunity to take one leg into the position. 

If you’ve taken my Technical Analysis Course, you know how I work in legs. I don’t just buy my full position. If I wanted say 6% in this particular sector – if it does pull back to the $137 and successfully stay there or above it – I might take 2% at first. And then, I might wait another week or two and buy another 2%, etc. [00:11:30] Whatever the case, you do things in stages, you do things logically, you do things with discipline, and you follow your rules. I hope this has been an educational piece that will help to understand breakouts and one more way to trade them. You have a good day and I will see you in a week.

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