UnitedHealth Group (UNH) saw a significant 16% increase in its stock following a strong earnings report, despite facing challenges such as the recent cyberattack on its subsidiary, Change Healthcare. However, recent market trends have begun to reveal cracks in UNH’s once robust rally. Two key technical indicators suggest a bearish bias on UNH: the Relative Strength Index (RSI) and the Directional Movement Index (DMI). The RSI is showing a downward curve, signaling a loss of upward momentum, while the DMI is indicating a potential shift in the current trend as the DI lines change direction.
The declining trend in the Average Directional Index (ADX) further supports the notion that the current rally may not be sustainable. As UNH’s stock price was rising, the ADX was consistently dropping, indicating a weakening trend. These technical indicators combined suggest that UNH is at risk of a downward correction in the near future, potentially eroding the gains from its recent rally.
In response to the bearish signals, a trade strategy known as a “bear put spread” is being considered. The trade involves buying a $495 put and selling a $490 put for the same expiration date. By constructing this spread, traders aim to profit from a potential decline in UNH’s stock price. The simplicity of the ATM spread allows for easy calculation of the trade cost, which in this case is $2.50. If UNH’s stock price falls below $490 by the expiration date, the trade could double the initial investment, providing a 100% return.
To manage risks effectively, traders adopting this strategy adhere to a rule of closing the trade if a 50% loss of the initial investment is incurred. This disciplined approach ensures that winning trades outweigh losing ones, maintaining a favorable balance overall. By focusing on optimizing gains and mitigating losses through strategic trades, traders seek to navigate the market volatility and capitalize on potential opportunities for profit.
The evolving technical indicators and market trends suggest that UnitedHealth Group may be facing increased vulnerability in its stock price, potentially paving the way for a bearish correction. By applying a structured trade strategy like the bear put spread, traders aim to capitalize on potential downward movements in UNH’s stock price while managing risks effectively. It is imperative for traders to remain vigilant, analyze market dynamics carefully, and adapt their strategies to navigate the evolving landscape of the stock market.