Zimmer Biomet (ZBH) gaped higher Tuesday and made what many chart watchers would call an island bottom pattern. Robert Edwards and John Magee in their classic "Technical Analysis of Stock Trends" observed or noted that "the island pattern is not common and it is not in itself of Major significance...it does as a rule send prices back for a complete retracement of the Minor move which preceded it."
Keeping those decades old observations in mind, let's look at the charts and indicators for ZBH.
In this one-year daily bar chart of ZBH, above, we can see a gap lower at the beginning of November followed by a two-month sideways consolidation and then a gap up yesterday. As noted earlier, this pattern resembles an island -- a body of trading separated by gaps. Our late-to-the-part moving averages offer limited help with this pattern.
The On-Balance-Volume (OBV) line follows prices down and back up. The Moving Average Convergence Divergence (MACD) oscillator is close to an outright buy signal as it is near the zero line again.
In this three-year weekly chart of ZBH, above, we see some wide swings up and down. A nimble trader may love the volatility but a trend follower could be challenged. Currently, prices are below the flat 40-week moving average line but a test of that line could come soon.
The weekly OBV line shows periods of accumulation and distribution. Currently, the OBV line has stabilized with prices in November and December. The MACD oscillator in the lower panel is close to a cover shorts buy signal but a long way from an outright go long signal.
In this long-term Point and Figure chart of ZBH, above, we can see a broad sideways trading pattern. If you drew a line across the $106 level you would notice that there is more activity below $106 than above $106. Taking a long-term view, this activity below $106 is likely to be accumulation. While this chart only gives us a $116 price objective for ZBH at this time the longer-term implication is for much higher prices.
Strategy: If prices continue higher they are likely to encounter resistance above $120. There is no guarantee the rally continues and I would not rule out a pullback to $105 and further sideways price action. If you need to probe the long side you probably need to risk to $101 -- too rich or too risky for me.