Schwab Live: Midweek Market Trend for February 22, 2017

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While the market and many sectors have been marching to new highs, some sectors have been laggards.  Energy is one.  The sector is well below its all-time high which was reached in the summer of 2014 and is strongly correlated to the price of oil (Figure 1).

Figure 1:

Source: StreetSmart Edge®

Oil itself has been in a tight range since the end of last year as the forces of supply and demand seem to be balanced.  On the one hand, the OPEC/NOPEC signatories to the production cut deal hammered out last year seem to be sticking to their quotas, and last Thursday there was news that the parties were prepared to extend their cuts further into the year than the initial summer deadline. On the other hand, U.S. production has been steadily increasing along with the U.S. rig count.  Until this supply/demand balance is disrupted, energy is likely to remain range bound.

Another sector that is well off its high is healthcare, although here, things seem to be improving (Figure 2).

Figure 2:

Source: StreetSmart Edge®

The sector broke a multi-month downtrend line at the beginning of the year (A) and held it in its first pullback (B). Also notice how its relative strength line versus the market has been in an uptrend since the latter part of January.  (C).

One industry within the sector that looks interesting is pharmaceuticals (Figure 3).

Figure 3:

Source: StreetSmart Edge®

First, its recent performance has allowed its relative strength line to break through its downtrend line (A).  Second, it has also broken out of a three and a half month trading range (B). So how far could it run, at least in the short term?  Some technical analysts would measure the height of the range (C) and add this distance to the breakout price to set an initial target (D). Please keep in mind, though, that this “target” is based on historical performance, and should therefore not be considered a certainty.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

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