Intuitive surgery: Basically quite valued, technically risky (technical analysis)

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Panuwat Dangsungnoen

Investment thesis

Intuitive Surgical Inc. (NASDAQ:ISRG) is a strong technology leader and is also a long-time performance leader in its industry and sector. But the title suffers from a persistent downward trend since its ATH in December 2021, which led to the stock losing 50% of its value. Although its ability to quickly return to a favorable market, the stock now appears to be heading towards the lows set in June 2022, and could even break below those levels, as it accumulates significant weakness. If the June lows do not hold, the most likely support levels are at $181 and $170.50, with a near-term worst-case scenario around $161. If the stock manages to rebound in the short term, investors should be wary of its strongest overhead resistance, now set by its EMA50, EMA100, and trend channel ceiling.

A quick overview of the big picture

After showing some strength over the past year, the U.S. healthcare sector has recently plunged back into negative territory, led by pharmaceutical retailers, specialty and generic drug makers, and service-providing companies. health information. Companies in the medical distribution industry, as well as those providing health care plans and medical care facilities, may follow better in the group.

3M Health Sector and Industry Performance

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Performance of health industries over 1 year

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The iShares US Medical Devices (IHI) ETF has significantly underperformed the broader healthcare SPDR (XLV) since November 2021. The industry started to improve in July 2022 and showed some relative strength in August through mid-September, but has since lost momentum and is now down to the lows seen in June. The industry benchmark appears to be struggling to overcome its long-term downtrend as it was rejected between its EMA100 and EMA200 and is now heavily trending negative and priced below all of its major moving averages.

IHI vs. XLV 23.09.2022

Author, using TradingView

Looking even further, Intuitive Surgical has outperformed its main industry benchmark and has been able, for the most part over the last 5 years, to hold its own significantly better in its industry, but has recently corrected sharply, translating into a performance of 69.04% over the time analyzed, slightly worse than the iShares US Medical Devices (IHI) ETF and nearly 30% lower than the broader tech market.

Intuitive surgery vs 5-year market 23.09.2022

Author, using SeekingAlpha.com

Where are we now?

Since my last Intuitive Surgical Faces More Challenges article published on May 10, 2022, in which I suggested that the stock is basically at a fair price and may be in an unfavorable technical situation, the stock has lost more than 14% and only bottomed on June 16, when instantly forming a strong rebound that sent the stock up 31% through early August. The recent retracement is characterized by a substantial increase in selling volume and relative weakness as the stock was rejected during its attempt to break the EMA50, and is now close to the lows seen in June.

Intuitive surgical real situation 23.09.2022

Author, using TradingView

While it is still early to determine if a new meaningful downtrend is forming or if this pullback is part of the bottoming process, it is important to note that from the top in August to the overhead resistance formed by the trend, trading sessions were characterized mostly by heavy sell-side volume, and more positive days failed to convince in terms of volume. The stock is technically in a very unfavorable situation, and it is worth estimating what the most likely outcomes might be, so that the contingency plan can be adjusted.

What comes next

While the stock still looks fundamentally reasonably priced, it looks technically more likely to continue its short-term downtrend, as I expect the stock to slowly improve its performance in its near-term sector, citing of sporadic relative strength. Levels near the June lows will indicate whether the stock is trying to form a strong base from which to begin its next breakout attempt, or whether new lows will be reached.

Table of technical analysis of probable results of intuitive surgery 23.09.2022

Author, using TradingView

If the stock does not rebound from its support around $187, my projections suggest that the most likely near-term price target is set at $181, $170.50 and successively at 160.60. While I qualify the upside potential at around $210-240, with possible catalysts ahead, the company will release its third quarter results around mid-October.

Investors should closely watch the price action and how the stock behaves at the next levels of support and resistance, and how a possible attempt to break below its support is confirmed or rejected, especially watching the volume two-way exchanges and relative strength. The stock could continue by forming an extended downtrend and overcoming its low set on June 16, which would take the stock to price levels not seen since pandemic lows. If the stock rebounds instead, the next significant resistance levels are set by its EMA50, EMA100, and trend channel ceiling. As the stock has just widened, I would pay close attention to the next few sessions and keep my stop-loss tight, to avoid being caught in a continuation of the downtrend.

The bottom line

Technical analysis is not an absolute instrument, but a means of increasing the probability of success for investors and a tool allowing them to orient themselves on any value. You wouldn’t drive to an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on Elliott Wave Theory, as well as probable outcomes based on Fibonacci principles, confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or refute an entry point in the stock, by observing its sector and industry, and especially its price action. I then analyze the situation of this stock and calculate the probable results based on the theories mentioned.

As described in my previous article, Intuitive Surgical has significantly outperformed the market and its larger competitors over the past few years, but its stock has recently corrected sharply, and despite the June 16th low, the stock is likely heading towards more weakness because it is technically in a very unfavorable situation. While ISRG has shown it is capable of reversing losses quickly, any breakout attempts have been rejected so far, and stronger selling volume and negative momentum are building.

While a rebound is possible ahead of the next Q3 earnings release, the stock is facing significant broad resistance as it is expected to overcome not only all of its largest trailing averages, but other levels of weakness as well. important retracement and the trend channel, which was a major resistance. Upcoming sessions will provide more clarity on the direction of the action as the downtrend may still be confirmed, attempting to reach the low set in June, and further drive the action to price levels between $170 and $181, or worst-case scenario, around $161. Although the stock may attempt to bottom out as it is also basically at a fair price, the downside risk still outweighs the upside potential, and I continue to refer to the stock as a hold position and would manage certainly close the risk of greater weakness.

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