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Pfizer Laboratories Worth The Play?

01/03/11 11:44:33 AM
by Koos van der Merwe

With the Obama health plan coming into play in spite of opposition, is it worthwhile to invest in pharmaceutical companies?

Security:   PFE
Position:   Accumulate

Pharmaceutical companies need money for research so they can find new drugs to treat diseases, especially when patents on existing drugs start expiring. That is why drug prices are high. Generic companies like TEVA profit when patents expire. Without doing any research they score well with sales of a cheaper product that has proved highly effective. In Canada, which has a social medical aid system, when a doctor prescribes a drug for a patient, the pharmacy has the right to substitute a generic, unless the doctor specifically states on the prescription that he wants the original dispensed. With the United States moving in the direction of a socialized medical aid system, the same generic substitution will occur. This is the reason why the large drug companies spent millions in their attempts to kill the Obama health care system. Keeping this in mind, we must ask, "Is it worth buying pharmaceutical companies?" The market thinks it is.

Graphic provided by: AdvancedGET.
Figure 1, a monthly chart of Pfizer Labs, shows that Wave C bottomed in a classical Elliott wave count in March 2009. Since then the share has completed a Wave 1 and a Wave 2 of a new bull trend, with Wave 3 projected at the minimum to $23 as shown by the Fibonacci projections. The bull trend is confirmed by the relative strength index (RSI), which is rising.

Graphic provided by: AdvancedGET.
Figure 2, a daily chart, shows a more detailed count of the Elliott wave count, and because its RSI is approaching overbought levels, we could see a wave 2 correction of Wave III appearing in the near future.

Graphic provided by: OmniTrader.
Figure 3 is a weekly OmniTrader chart. I have chosen a weekly chart rather than a daily one because of the wave 2 correction expected, as suggested by the wave count. A weekly chart is a long-term chart that should be used by investors. The chart is suggesting a buy at present levels. This suggests that the wave 1 top suggested on the daily chart of Figure 2 still has upside to it. Note that both the ergodic oscillator and stochastic RSI Cycle indicator are both suggesting strength.

I would be a buyer of Pfizer Labs at present levels but would keep my trailing stock close. Or I would wait for the correction and buy as the stock corrects into Wave 2 of Wave III. Definitely a share on my watchlist.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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