Stocks (S&P 500) Converging and is Breakout Near? Usually a Continuation Pattern (More Downside Ahead?)

U.S. Stocks, as represented by the S&P 500, are converging towards a certain price, forming a wedge or symmetrical triangle pattern.



Chartists and technicians often say that near the end of the triangle or wedge, a breakout could occur with good volume. While the breakout could occur in either direction (up or down), the pattern is often a continuation pattern of the previous trend:

"While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout." (stockcharts.com)

Since the previous pattern had been down, this means that the continuation pattern would mean further downside.

Following stockcharts.com recommendation of estimating the strength of the move, we can take the widest part of the symmetrical triangle (approximately from $SPX level 1010 to 740 or so, for a depth of 270 S&P 500 points), and then apply this at the breakout level.

If the breakout occurs near 870, that means that the move could extend down 870 - 270 for a target of S&P 500 600. This lower target of S&P 500 value of 600 matches previous lower target analysis of a bottom of 450 to 600.

But as many sites warn, while the wedge or symmetrical triangle pattern is usually a continuation pattern, it could also be a reversal pattern, so let us observe the breakout and the validity of the move according to stockcharts.com.



Today's Stock Chart

Profit from Big Government Healthcare Waste

There is a trend towards Big Government and Big Government Health Care, especially with the traditionally Big Government and Big Health Care Democrats having control of both the Executive and Legislative Branch of the United States.

With so much money being spent on Health care, Government sponsored Health care, there is a niche area to recover much of the waste and inefficiencies.

HMS Holdings (HMSY) is an $800 Million company that does just that.

HMS Holdings is the nation's leader in coordination of benefits and program integrity services for government health care programs. The company’s clients include health and human services programs in more than 40 states, 80 Medicaid managed care plans, the Centers for Medicare and Medicaid Services (CMS), and Veterans Administration facilities. HMS helps ensure that health care claims are paid correctly and by the responsible party. As a result of the company’s services, government health care programs recover over $1 billion annually, and avoid billions of dollars more in erroneous payments.

HMSY has a Forward PE of 32.20, and 5 year estimated growth rate of 26%, for a PEG of around 1.25 (PEG under 1 is a value, over 2, is too expensive).

The Stock chart of HMSY is showing strength (as of January 20, 2009), and the stock is above both the 50 day and 200 day moving average even in a bad market.

On January 13, 2009, HMSY has updated its earnings guidance for fiscal year ending December 2008, and due to better than forecasted business performance for the fourth quarter of 2008, the company is revising its 2008 full year EPS guidance from $0.77 to a range of $0.78 to $0.79.

All of this good news is occurring in a bad market.

The Company's website is www.hmsholdings.com.

Profit from Obama's Digital Health Care Initiative

President Elect Obama has an initiative to modernize health care by making all health records standardized and electronic, within five years.

The idea is that the quality of health care will get a big boost, and costs, over the long run, will decline. But this will come at a cost of around $75 billion to $100 billion over ten years according to studies from Harvard, RAND and the Commonwealth Fund.

Can we profit from this?

Some Health Care Information Stocks

1. Athena Health (ATHN): Athena Health provides Internet based business services for physician practices in the United States. "Its service offerings are based on proprietary Internet-based software, database of payer reimbursement process rules and back-office service operations." The company is a $1 Billion company, with a Forward PE of 40, a 5 year estimated growth rate of 32% for a Price Earnings to Growth Rate (PEG) of 1.25 (more than 2 is expensive, less than 1 is a great value).
   
   
2. Quality Systems (QSII) : Quality Systems engages in the development and marketing of health care information systems in the United States. Its system automates various aspects of medical and dental practices, and networks of practices. The company also offers proprietary electronic medical records software and practice management systems. QSII is a $1 Billion company with a Forward PE of 19, 5 year estimated growth of 19% for a reasonable PEG of 1. It even has a forward Yield of 3%
   
   
3. Allscripts (MDRX): Allscripts-Misys Healthcare Solutions, Inc. offers software, services, information, and connectivity solutions that enable physicians and other health care providers to deliver patient safety and clinical outcomes primarily in the United States. It operates in four segments: Professional Solutions, Enterprise Solutions, Health Systems Group, and Medication Services. MDRX is a $1.2 Billion company, with a forward PE of 13.4, a 5 year estimated growth rate of 17% for a bargain PEG of 0.78.
   
   
4. Cerner (CERN): Cerner Corporation provides health care information technology solutions, health care devices, and related services in the Americas, Europe, the Middle East, and the Asia Pacific region. CERN is a $3.1 Billion company, with a forward PE of 15, an estimated 5 year estimated growth rate of 20% for a good PEG of 0.75.
   

Future of Digital Records and Health Care Information Systems

The Future of Digital Records and Health Care Information Systems is bright, even without President Elect Obama's Digital Record initiative.

However, from a short term point of view, there could be challenges. Earlier this month, firm Leerink Swan downgraded ATHN from Outperform to Market Perform. The Analyst Bret Jones said that "Our best guess as to the time line for federal money to work through state grant and loan programs in any material way is at least 12-18 months." Bret Jones also mentioned that the climate for health care IT companies is still very difficult, and investors may be disappointed as they wait for the stimulus package to take effect.

But if we look at the longer term, there is great promise in this area.