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Bullish counts and bearish counts in play

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In today's 11:00 EST Update on OptionInvestor.com, we recommended that traders short/put shares of Oracle (NASDAQ:ORCL) take some profits off the table with the stock trading near the $9.00 level. This was the bearish vertical count from the point and figure charts.

Now I'm going to turn to the bulls and also recommend they take profits in shares of Unitedhealth Group (NYSE:UNH) as that stock did trade the $91 level, which was its bullish vertical count.

Unitedhealth Group Chart - $1 box

A subscriber e-mailed me that UNH was trading our previously mentioned bullish vertical count and was wondering what he should be doing with his stock. I'd advise the trader to take at least 1/2 of the position off the table at current levels and place a trailing stop on the other 1/2 at $85. Stocks can always exceed their vertical counts and this strategy (if acceptable) allows the trader/investor to pay themselves for the risk they took, while still allow for further upside. I would have no qualms with a trader/investor selling the entire position either.

Now... did you study and understand the dynamics that took place in UNH? the eventually powerful spread triple-top at $70? Professor Davis' study noted that the spread-triple was profitable in a bullish trade 85.7% of the time, for an average gain of 22.9% in a 7.7 month time span on average. Well, UNH met/exceeded that average with a trade at $86.03 (1.229 * $70).

Now this gives some "hope" and insight perhaps to bulls in Cardinal Health (NYSE:CAH) $69.85. I get lots of e-mails (mostly when the stock is down) about this stock which I've profiled as bullish in the past month. Study the supply/demand chart and make some comparisons to that of UNH.

You and I don't know for sure, but technical analysts play patterns and what the market presents them. Then they measure against the past to look for confirmation. So far, I see some similarities in CAH that we pointed out in UNH months ago. Check it out!

Cardinal Health Chart - $1 box

The supply/demand picture for CAH is similar to that found several months ago in UNH. True, they are two different companies in different sub sectors of healthcare. However, this is also their "similarity" as far as sector association goes.

In past comments, one reason besides the bullish technicals developing in CAH was the thought that investors in the HMO's (particularly institutional fund managers) might eventually take some gains in the HMO's and rotate those gains to other "healthcare" names like a CAH.

If you were managing a healthcare sector fund, what would you be thinking of doing or actually doing with some of your HMO stocks that have gained 50% or more like a UNH in recent months?

Remember, you're a sector fund and have to stay in the healthcare space.

You know how investors can be, especially with mutual funds. When you look through the paper each weekend, what group stands out to you as a place where investors contributing to a mutual fund might go. As usual, the "hot funds" get all the money and as we've pointed out since the beginning of the year, "healthcare is hot."

If you're a healthcare fund manager and are getting loads of cash deposited to your fund, what are you going to be buying? Oracle (ORCL)?

Jeff Bailey
Senior Market Technician
Option Investor

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