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Cardinal Calling

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Last week, Jeff Bailey and I made some observations concerning Cardinal Health (NYSE:CAH). The stock broke out of a point and figure pattern last week. The pattern that CAH completed last week was very similar to a pattern broken several years ago. That breakout several years ago led to a big rally in the stock.

Over the weekend, Jeff and I did some more work on the stock, adding to our observations last week.

Look back to April 2000 when the stock broke above its 200-day moving average $35 on the bar chart. Breaks of the 200-day are considered longer-term changes of trend. They often attract institutional investors, who will often support a stock after it breaks above its 200-dma.

April 2000 200-DMA Breakout

Take a look at what was taking place in April of 2000 down at the $34-$35 level. The stock was bouncing between the $30 and $33 levels, in the process forming a triple top at the $33 level through which the stock eventually broke out. In fact, the breakout from the triple top came on the day that CAH broke above its 200-dma.

April 2000 Triple-Top Breakout

Calculate the bullish vertical count back then. You would have counted the column of X from $31 to $44. Your equation for the vertical count would have been:

((14*3)*1)+$31 = $73

While the stock did eventually give a sell signal, which would have negated the bullish vertical count of $73, would you like to venture a guess where the all-time high has been for CAH? The high was up around $77 -- pretty darn close to its initial price objective from that triple top breakout.

There may be some seasonality at play in this stock as well. One thing that Jeff observed was that CAH has the habit of staging big moves from the April time period through June. The stock has done so in the last three years.

The only real negative we can find is that CAH is still under performing the broader market, as measured by the S&P 500 (SPX.X), though that could change after today's pop higher. The stock has been under performing the broader market since January, but has since put in some upside repair work on the relative strength chart.

Depending on how the market and CAH close today, the stock could be back into a column of Xs on its relative strength chart, which would have the stock out performing over the short term. On an intraday basis, the stock has reversed back into a column of Xs, but that could change. We'll have to wait for closing values before definitively saying whether or not CAH is back to out performing the market. To take it a step further, a buy signal on the relative strength chart would have us increasing bullish conviction. Until that happens, however, we're only using 1/2 positions in this trade. A buy signal on the relative strength chart would have us adding to those positions.

CAH versus SPX.X

There was new out this morning for CAH that may explain its breakout. The company reported that it would acquire Magellan Laboratories, a leading full service contract pharmaceutical development firm. The terms of the deal were not disclosed.

Given the technical set up that we spotted in CAH last week, the stock may have broken out in today's session on its own merits, so it's difficult to give this morning's announcement too much credence. What's more, the stock is breaking out in a relatively weak health care environment, as the drugs (DRG.X) and HMOs (HMO.X) trade poorly today.

The similarities are uncanny, which is why we're positive on CAH over the next several months. The stock should fit nicely into an intermediate-term trader's time frame, reinforced by the breakout above the 200-dma today. We'd like to see volume pick up into the close and a settlement above the 200-day at session's end.

CAH - Daily

Eric Utley
Option Investor

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