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A trick for looking at stock splits

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One of the worst trades I put on as a trader was years ago when I shorted shares of Amazon.com (NASDAQ:AMZN) just before the stock split 2:1. The supply/demand chart looked terrible on a pre- split basis, but just after the stock split 2:1, I realized my mistake. I had actually shorted the stock based on "what was" and not "what was going to be" and found myself in a heck of a lot of trouble. I've tried to learn from my mistakes and here's what I've learned and how to use the point and figure charts to help get a feel for how a stock split will actually look before the stock splits its shares. At the close of trading Friday, shares of Lincare Holdings (NASDAQ:LNCR) will split its stock 2:1 and begin trading at 1/2 today's current level of $64. Here's what the supply/demand chart looks like now, then we'll take a look at the stock on a post-split basis.

Lincare Holdings - $1 box current

It looks like shares of LNCR did jump from the $55 to $65 level on a move ahead of its upcoming split and then sold off right back to a triple top buy signal of $59 and have once again moved higher. A trader of this stock is probably "worried" about the high pole warning the stock gave when it pulled back to the $58 level, but that might not be of concern once we understand how the stock looks on a post split basis. While first thinking would be to simply split the scale of the above chart in half to reflect the 2:1 split, we actually do just the opposite and multiply the scale by 2 boxes to get the true effect of how the stock would chart using the 3-box reversal technique we use on the point/figure charts. Check it out!

Lincare Holdings - box scale multiplied by 2

By splitting its stock, you get the feeling the board of directors is trying to attract a broader group of investors to its stock and build interest into the shares. On a post split basis it becomes relatively apparent that the stock recently tested long-term bullish support at $25 (post split scale) and rocketed higher. The recent trading at $56 on the first chart from above probably doesn't carry near the bullishness perhaps as that trade looks on a post-split basis and the chart directly above. On a post-split basis, we would perform a vertical count on that chart and see the longer-term price objective for the stock would be $47 (on a POST SPLIT basis). If I'm looking at recent pattern of this stock, I might think the stock has a habit of trading 2-boxes above the buy signal and that would put the stock at $68. Perhaps this is just where the stock ends up before it splits its shares on Friday should it continue to run into the split. Now lets pull in some information for the Healthcare Index (HCX.X) to get a feel for how things could unfold on the bullish and bearish side.

Healthcare Index - last eleven months

Currently, I'd say the Healthcare Index (HCX.X) looks bullish and it is trying to get back above its 200-day MA, which is considered a longer-term moving average. By using our retracement bracket and understanding levels, we see that trading above the 857 level would be cause for further bullishness, while a break much below the 825 level (50% retracement at 827) would be cause for concern to a downside move in the sector and perhaps broader healthcare stocks. Hopefully traders see how they can pull different techniques along with multiple sector and stock analysis for truly doing some homework in how to set up a potentially bullish trade. Using the 2:1 stock split as a catalyst for a move in a stock in a SECTOR that also is showing some promise. I would also point out that current market conditions may have money finding its way to the healthcare group as it may be less scrutinized based on broader US economic conditions. While it may be true that Americans forgo some healthcare needs during an economic slowdown, we all know that we can't work if we're sick. In a more defensive market environment, healthcare stocks seem to attract institutional money. Notice how the HCX.X managed gains from October to December when the broader markets were headed lower. I think the sell off in the group in January was tax gain selling related and also a time when many investors began selling their winning healthcare stocks because they held onto their losers way to long.

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Jeff Bailey
Senior Market Technician

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