Stock Of The Day: Is Universal Health About To Rebound?

After dropping more than 6% on Wednesday, Universal Health Services, Inc. (NYSE:UHS) is trading marginally higher on Thursday. The drop came after Bank of America said it remains cautious on hospitals. 

• What’s driving UHS up?

Universal Health is the Stock of the Day. It is both oversold and at support; these could be bullish dynamics that could suggest a move higher.

Many trading strategies and methods are built around the concept of reversion to the mean. If something goes too far in one direction, there is a good chance that it will reverse and head back in the other direction.

Some of these strategies are based on statistics and probability theory.

Standard deviation is a statistical concept. Probability theory says that 95% of data samples should occur within two standard deviations of the mean or average.

This concept can be applied to the stock market.

Read Also: Silver’s Extreme Price Swings Are Here To Stay, Goldman Warns

The red line on the chart of Universal is called a Bollinger Band. It is two standard deviations below the 20-day moving average. As you can see, the stock is underneath it.

Because 95% of trading should occur within two standard deviations of the mean, the fact that the stock has exceeded this threshold to the downside means it can be considered oversold.

This will draw buyers into the market. They will be anticipating a reversion to the mean or a move higher. Their buying could put the stock into an uptrend.

Universal has also reached a possible support level.

As you can see on the chart, levels around $208 were resistance in October. When this resistance broke and the price moved higher, some people who sold at it were sorry they did.

A number of them vowed to buy their shares back if they could eventually do so at the same price they were sold. This large group of buyers has created support at the former resistance level.

Stocks that are oversold and at support tend to rally. That could happen here.

Photo: JHVEPhoto via Shutterstock