Medical Properties: Still A Buy With A Stronger Setup (NYSE:MPW)

Investment thesis

Medical Properties Trust, Inc. (NYSE:MPW) despite being in a long-term downtrend, is offering interesting trading opportunities and has given some signs of resilience necessary in a more long-term investment perspective. The expected consolidation is completed, and MPW has since gained positive momentum, leading me to assess the situation anew. In this article, I will give an update on my strategy by considering multiple scenarios, while I consider tightening my trailing stop-loss to make sure I would be on the sidelines if the stock would follow none of my likely scenarios.

A quick look at the big picture

The U.S. real estate sector has more recently slowed in its positive momentum, losing some of the relative strength it was building, as some groups, in particular real estate investment trusts (“REITs”) in the hotel and motel industry, as well as industrial and residential REITs, are still weighing on the sector’s performance. REITs in the healthcare facilities industry continue to perform positively, although having lost some momentum observed during November 2022, while real estate service companies and real estate developers lead the sector.

The Real Estate Select Sector SPDR ETF (XLRE) after rallying from its bottom on October 13, 2022, until reaching its EMA200 on its weekly chart, has since consolidated. In the past week, it has started its second attempt to overcome its strong overhead resistance. XLRE is still not building up enough relative strength when compared to the broader iShares Russell 2000 ETF (IWM), but this may change at any time, as the sector references positive momentum that seems to expand when considering its MACD.

Where are we now?

In my last article, “Medical Properties Trust: After 20% Performance It’s Time For An Update,” published on December 1, 2022, I discussed multiple outcomes which I now want to update. By observing the recent few weeks, I rule out the scenario of a wave four formation, considering the initial hypothesis of a completed downward impulse sequence as accepted, and will focus on the other two scenarios of a corrective wave formation or a new upward impulse sequence.

The expected consolidation began immediately on the day my article was published and extended even further than what I was projecting in my assumption in case of a corrective wave sequence on heavy increasing selling volume, breaking under my suggested stop-loss level, and hovering below it until the beginning of 2023. MPW has since recovered, forming what we could interpret as wave 2 of a new upward impulse sequence, or wave B of a corrective sequence.

MPW is facing its EMA21 for the second time, closing the past week exactly below it, while the selling pressure has stopped and the stock marked three weeks of solid buy-side volume. On its weekly chart, the stock still shows significant relative weakness, compared to the Real Estate Select Sector SPDR ETF, but this changed, as expected, on its daily chart, where MPW is accumulating positive momentum and hints at growing relative strength.

What is coming next?

We now look at MPW’s daily chart to analyze the most likely outcomes I see forming in the coming weeks. The first scenario considers a corrective wave formation, where the actual leg up is forming wave C, which could extend most likely until $13.64, $14.95, or $15.76. This scenario could imply that the upward movement would likely be limited to this extension and a further consolidation or an extended sideways movement could come up next.

The second scenario is instead considering the actual leg as forming wave 3 of a new upward impulse sequence. In this more bullish scenario besides the mentioned price targets, wave 3 could likely even extend until $17.07, before consolidating while forming wave 4.

No one can predict with certainty the upcoming price action, and despite my analysis considering multiple scenarios and targets, and giving hints to likely outcomes, it is essential to progressively observe the price action and adapt the contingency plan. As I want to see my scenarios forming or, otherwise, wait on the sidelines, I set my stop-loss tight under the EMA50, or even track the price-action while setting a trailing stop within the EMA21.

I would certainly size my positions progressively, as MPW is still in its downtrend. Despite being quite extended, it has still to prove its ability to invert its negative trend. I want to see the stock building significant relative strength on increasing volume, and exit its long-term downtrend, before I would consider increasing my position, even as a long-term oriented investor.

MPW’s short interest has again increased, now standing at 17.64%, while its short interest ratio has increased by another 50% to above 12 days, which could add fuel to the stock’s uptrend in case of significant upward momentum.

The bottom line

Technical analysis is not an absolute instrument, but a way to increase investors’ success probabilities and a tool allowing them to be oriented in whatever security. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. 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.

Medical Properties Trust, Inc. formed the expected consolidation, and despite extending more than what I projected, the stock is now forming what could be wave C of a corrective wave sequence or wave 3 of a new upward impulse sequence. While it is early to determine which of the discussed scenarios is more likely to form, I would certainly continue to closely observe the Medical Properties Trust, Inc. price action and follow my contingency plan, as if none of those scenarios will form, I prefer to wait on the sideline for more clarity. The discussed strategy is leading me to continue to rank Medical Properties Trust, Inc. as a buy position, but I would keep my stop-loss tight and would certainly size my positions progressively, as the stock is still in its downtrend and could take some time to recover significantly.