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Ask The Trader
Wednesday, February 14, 2001

Universal Health Services Revisited

What made you guys pick this stock, so that I can look for this pattern in other stocks. I got in when you did and have a nice profit now. Thanks!

The chart pattern that keyed us into Universal Health Services (NYSE:UHS) is most commonly seen during a recovery in the market. In this case, however, it was a recovery in a sector that was the main catalyst behind this pattern.

The S&P Healthcare Sector (HCX.X) sold off sharply after the Fed cut rates by 50-basis points on January 2nd. This sell off continued for another two days before finding support just above its 200-dma.

UHS was not spared from this downdraft in the HCX.X. However, what caught our eye is how far and how quickly this sector sold off. In addition, (and more importantly) Universal's free fall caught support at a level that coincided with no less than two other significant levels where buyers had stepped up in the past.

Adding to the attractive risk/reward scenario of the trade was the fact that the MACD had just turned positive and the downside to the trade was $4.50, as opposed to the upside potential of $10.80. The downside was measured by taking the difference between our entry point and support. Visa-versa, the up side was measured by taking the difference between resistance and our entry point.

This may sound very basic but measuring risk/reward should become a habit before every trade that you make. It is vital to make sure that you are not taking on too much risk to capture too few rewards (your upside potential should ALWAYS be more than you are willing to risk on the downside). In addition, this forces you to think about where to set your stops and where you will exit a trade with your profits.

Surprisingly, the "getting out with a profit" part can often times be the hardest part of a trade. Greed is a nasty emotion that commonly takes over when a trade starts going your way. Make it your goal to trade by the rules and not on emotion.

Good Luck and Have a Profitable Trading Day

Craig Seidler
Assistant Editor

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