HUM is an HMO company that had been on a rally since July 31th when the stock got down to a low of 59.92. The rally was probably based on the possibilities of a Romney win. Nonetheless, the re-election of Obama caused the stock to break and gap down sharply on Wednesday from 74.57 to 71.08. The stock got all the way down to 68.07 before some buying interest was seen. The gap down was valid inasmuch as it came from a piece of news as well as from the fact the stock broke the 50-day MA, currently at 72.45, from the opening bell and the break of the line has now been confirmed with red closes on Thursday and Friday making the 50-day MA and the gap area a strong resistance from now on.
From purely a chart basis, HUM only has 1 minor intra-week support level at 67.97 that was evidently tested successfully on Wednesday with the 68.07 low. Nonetheless, if the stock is unable to generate new buying interest, that support level is likely to break and a retest of the 21-month low at 59.92 is likely to be seen. It should be mentioned that the 200-week MA is currently at 59.15, suggesting that a drop down to that level to test that line, as well as the previous low, is highly probable based on the fact that Obama Care is not likely to help HUM but hinder it.
Since the index market is likely to be in a trading range this coming week and a rally seen toward the end of the week, the probabilities are decent that HUM will rally to test the 50-day MA before heading lower. A retest of the 50-day MA, which is always a good definer of short to mid-term trend, is likely to be seen on coattails of the index rally before new selling is seen. By the same token, it is highly unlikely that the line will be broken back to the upside, which would suggest the stock would be moving higher, based on how the company is likely to be affected by Obama Care.
As far as the stop loss is concerned, the 74.57 level (closure of the gap) would be the perfect stop loss but placing the stop loss at that level will severely reduce the risk/reward ratio as well as decrease the probability rating substantially. As such, the stop loss will be placed at the support level that was broken on Monday when the stock first spiked down. That support level was at 73.71. A return to that level would take away most of the bearishness of the chart.
Sales of HUM between 71.84 and 72.40 and using a stop loss at 73.71 and having an objective of 60.00 will offer a 6-1 risk/reward ratio.
My rating on the trade is 3.75 (on a scale of 1-5 with 5 being the highest).
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