Zimmer Biomet (NYSE:NYSE:ZBH) has been in a downtrend since August 2021, while significantly underperforming its industry for 5 years. The stock broke the important support mentioned in my article published in May and despite a recent attempt to break out of its downtrend, the stock seems to need much more conviction and buying volume. The likelihood for further weakness is still high and the stock is facing significant downside risk, with only some minor support levels seen in the near term. My most likely price target is set at $111, followed by an even lower target at $97, resulting in a 5% to 17% downside risk from its latest closing price.
The healthcare sector in the US is among the winners in the last 3 months, led by a rebound in biotechnology stocks, followed by companies in the diagnostics and research industry, while companies in the medical devices industry performed less well in the group, but still achieving growth.
The iShares U.S. Medical Devices ETF (NYSEARCA:IHI) bottomed on June 16 and began to show some sporadic relative strength since the beginning of August, when compared to the broader healthcare sector, but is still in a long-term downtrend as it failed to establish itself over its EMA200 and is now consolidating around its EMA50.
Looking back even further, Zimmer Biomet significantly underperformed its main reference indexes and funds, reporting only 3.44% performance over the past 5 years, almost 25 times less than the IHI and almost 16 times less than the Health Care Select Sector SPDR (NYSEARCA:XLV).
Since my last article Zimmer Biomet Is Hobbling Behind The Market, the stock broke the mentioned support at $111.40 and fell further until $100.39, where it found some support on July 14, 2022. The stock successively rallied 18% during the next month, but retraced most of the gains shortly after, bottoming again at the beginning of September. The recent rally on significantly higher volume was an attempt to exit the long-term downtrend, but the stock failed, for the moment, to overcome its EMA200.
Although some relative strength seems to build up, and the stock shows some positive momentum confirmed by its MACD, which just crossed its signal line, it will need substantial volume and conviction to overcome the strong overhead resistance. The latter is set by the EMA200, and the upper limit of the downtrend channel, while some support could be found at the EMA50 at around $111.
I expect the stock to continue to underperform its reference industry and sector, while some sporadic relative strength can offer some short-term opportunities, the stock seems to be more likely to form a sideways movement or continue in its downtrend.
The stock just completed its corrective sequence, a new downtrend based on a new Elliott impulse sequence could likely begin. My calculations based on Fibonacci's theory, suggest the most likely price target is around $97 if the stock breaks its next target at $111, otherwise a consolidation around that price level could form and the stock could move sideways before taking a more decisive direction.
Investors should observe the price action and how the stock behaves at the next support levels, and how an eventual attempt to overcome its resistances is confirmed or rejected, by particularly observing the trading volume in both directions. As the breakout over the EMA200 seems hard in the short term, I don't see a significant chance for the stock to rise above that level and consider the still significant downside risk. At this price level, the EMA50 could serve as a trailing stop, to protect from eventual drops.
I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci's principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories. Zimmer Biomet has many elements that indicate the stock is a long-term laggard in its industry, and its downtrend seems to be intact, despite recent attempts to overcome significant resistance. I see the stock likely reaching $111 as the first target and possibly dropping to $97 if the selling pressure in the stock continues in the near term. In this sense, I would consider the EMA50 as my trailing stop-loss and not wait for the stock to bottom again, as the likelihood to test the recent lows is still too high.
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Additional disclosure: All of my articles are a matter of opinion and must be treated as such. All opinions and estimates reflect my best judgment on selected aspects of a potential investment in securities of the mentioned companies, as of the date of publication. Any opinions or estimates are subject to change without notice. I am not acting in an investment adviser capacity, and this article is not financial advice. I invite every investor to do their research and due diligence before making any investment decisions. I take no responsibility for your investment decisions but wish you great success.