UnitedHealth Stock Trades Above ‘Reversion to the Mean’

Managed health care giant UnitedHealth Group Incorporated (UNH) has a winning streak of beating earnings per share (EPS) estimates in 25 consecutive quarters. The stock is in bear market territory at 21% below its all-time intraday high of $306.71 set on Feb. 19. The stock is also in bull market territory at 29.2% above its March 23 low of $187.72.

UnitedHealth stock closed last week at $242.45, down 17.5% year to date and below its monthly, quarterly, and annual risky levels at $269.16, $284.22, and $297.29, respectively. The stock is reasonably priced with a P/E ratio of 16.90 and a dividend yield of 1.69%, according to Macrotrends.

UnitedHealth provides health insurance services and is a member of the Dow Jones Industrial Average. Consumers looking for health insurance from UnitedHealth should be aware that individual coverage for those under 65 years old will likely be written on three-month intervals. Premiums are revised based upon claims history.

A major focus for the company is providing supplemental insurance for patients covered by Medicare. This includes prescription drug coverage. Keep in mind that, to qualify for these plans, you must also be a member of AARP.

The daily chart for UnitedHealth

The daily chart for UnitedHealth shows that the stock traded sideways until a spike higher on Nov. 15. This resulted in the formation of a “golden cross” on Nov. 29, when the 50-day simple moving average rose above the 200-day simple moving average, signaling that higher prices would follow. This tracked the stock to its all-time high of $306.71 set on Feb. 19.

The stock gapped below its annual pivot at $297.29 on Feb. 24. The quarterly pivot at $284.22 was a magnet between Feb. 24 and March 11, when it was a risky level. The stock tried to hold its monthly value level for March at $269.16. This attempt did not last long as the stock gapped below its 200-day simple moving average on March 16, ending the “golden cross.”

After trading as low as $187.72 on March 23, the stock traded as high as $257.96, failing just below the 200-day simple moving average, now at $258.55. Weakness since then has held its weekly value level for this week at $237.40.

The Weekly Chart for UnitedHealth

The weekly chart for UnitedHealth is negative, with the stock below its five-week modified moving average of $261.57. The stock has been trading back and forth around its 200-week simple moving average, or “reversion to the mean,” at $218.45, with last week’s close well above it.

The 12 x 3 x 3 weekly slow stochastic reading ended last week declining to 44.48, down from 50.35 on March 20. During the week of Jan. 24, this reading was above 90.00, putting the stock in an “inflating parabolic bubble” formation. Bubbles always pop, as did the bubble for UnitedHealth.

Trading strategy: Buy UnitedHelath shares on weakness to the 200-week simple moving average at $218.45. Reduce holdings on strength to its 200-day simple moving average at $258.55. The annual risky level remains at $297.29.

How to use my value levels and risky levels: Stock closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes on these time horizons.

Monthly levels for March were established based upon the Feb. 28 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an “inflating parabolic bubble” formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered “too cheap to ignore,” which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.