History Sets Up Bearish Drop For Aetna Inc (AET)Aetna Inc has been in a bullish trend since 2007-2008. It has been in a steeper, and narrower bullish trend for the past four months. On multiple occasions through the long bull trend, three of the technical indicators discussed below are at similar levels that they are at now. These instances have resulted in short-term losses for the stock. I have also conducted further analysis based on other historical information and readings that confirm a pending drop for Aetna Inc which are laid out below.
When we look at technical indicators, the relative strength index (RSI) is retreating from overbought but has been relatively neutral moving for the last month. The positive and negative Vortex levels have been moving in a manner consistent with downward movement for the stock, but haven’t bearishly crossed each other since March.
The stochastic oscillator K value is 83.1080 and D value is 87.5589. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the stock is trending up. When the D value is higher that the K value the stock is trending down. The stochastic overbought, but has remained near the levels for the past few weeks.
SPECIFIC ANALYSIS
I have created an algorithm (called the SAG gauge) which signals when stocks are truly overbought and oversold. The algorithm indicates when a particular stock meets multiple criteria which culminates in an oversold or overbought alert. That signal occurred June 26 as AET is truly overbought.
Upon back-testing this indicator, it has signaled overbought status 104 times dating back to 1977. The stock always drops 0.14%, which is not much, but it is something. Eighty percent of the time the stock drops at least 2% over the following 35 trading days after the indicator date. Seventy percent of the time, the stock drops 2.5% and fifty percent of the time drops 5%.
Since 2007, this stock always drops a minimum of 7.63% when the RSI, positive and negative VI are simultaneously at their current level and moving in their current direction. This additional study requires the stochastic at the bottom of the chart above to be overbought as it is today too. Ten similar instances were found going back to 2007. The minimum move occurs over 9 trading days resulting in a drop of 7.63%. The median move is 11.08% over 33 days.
Three of the aforementioned instances occurred at the same time the SAG gauge signaled overbought. The minimum days of movement and percentage dropped are outlined in the chart above with a orange rectangle (18 days, 8.51%). The median movement and percentage are represented by the light blue rectangle (28 days, 10.08%). This identical scenario is possibly playing out again. I do not fully trust three data points, but I will not ignore it either.
My conservative projection is dictated by the accuracy of the SAG gauge, identical situations disregarding the SAG overlaps, and identical situations when the SAG fires overbought when the RSI and VIs are at their current levels. The respective minimum drops are 0.14%, 7.63%, and 8.51%. The respective median drops are 5%, 11.08%, and 10.08%. I am confident the upcoming drop will rest between a 5-10% loss over the next 35 trading days.
A solid drop over the next few days is required for the full drop to take effect. A failure to pass the new healthcare plan by Congress prior to the upcoming recess could be this catalyst. Considering the RSI, VI, stochastic levels, SAG gauge and historical similarities favors a move to the downside. Based on historical movement compared to current levels and the SAG gauge, the stock could drop at least 8% over the next 35 trading days if not sooner.
