The biotech sector scored a short-term breakout last week, and the bullishness spread to its larger, more established cousins, the big pharmaceutical stocks. 

While most of these drugmakers have been strong of late, they have not broken out on their charts. However, one lagging stock in the group, GlaxoSmithKline (NYSE: GSK), has started to make its move. And given how much it lost over the past several months, its potential for gains is rather large.

The sector only recently started to outperform, so it’s still early in the market’s possible rotation into this group. However, in absolute terms, the NYSE Arca Pharmaceutical Index, known by its option root DRG, is on the verge of a long-term breakout best seen on the weekly charts.

Since peaking in August, the index lost more than 20% through its February low. In the process, it formed a nice declining trend channel, but on the chart shown, it also looks very much like a bullish flag.

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DRG has traded at the upper border of this pattern for the past week, and any further strength will spark an upside breakout. Considering this is a long-term pattern, it suggests a long-term rally may be at hand.

Note that the flag pattern retraced about one-third of the bull market from 2009. It’s not quite a Fibonacci number, but the market often gives us movements in thirds and threes. 

GlaxoSmithKline, on the other hand, retraced about two-thirds of its bull run from 2009. That gives it more room to recover as it tries to catch up to its peers.  

Of course, cheap can get cheaper, and a low price is not reason enough to buy any stock. It could be cheap for a reason, and GlaxoSmithKline did have its share of fundamental problems. But now the market is telling us that those problems are either in the past or about to be, as shares were finally able to rally with the sector and the market, and a seven-month period of sideways action, or basing, now appears to be resolving to the upside. 

Wall Street wisdom says to buy the strongest stocks in the strongest sectors, but I propose a variation on that idea. In a sector on the verge of a major breakout, I like to buy stocks that have already broken out. In that way, when the sector catches fire, those stocks should be leaders. And if the sector doesn’t break out, we still have an individual stock that is bucking the trend and rallying on its own technical merits.

GSK it trading above both its key 50-day and 200-day exponential moving averages. The crossover of these averages is often used to identify major turning points, and while not always whipsaw-free, it did give a great sell signal this past summer. Now, the 50-day is projected to cross up through the 200-day within the next month, which would be a bullish signal. 

But we can break this down into even simpler analysis. The stock is already trading above both of these moving averages, as well as the trendline drawn from the April 2015 peak. And thanks to Tuesday’s bullish performance, GSK moved above short-term resistance set by the early February highs.

Momentum is strong and sentiment according to social media site StockTwits is 94% bullish. Normally, extremely bullish sentiment is a contrarian indicator, i.e., a bearish sign. However, I have found that the collective wisdom of this site is usually correct. 

Toss in a healthy 6.3% dividend yield and a historically low trailing price-to-earnings (P/E) ratio of 8.7, and we have a very attractive buy candidate for a trade that should last well into the summer, delivering slower buy steadier gains.

A quick note: GSK is not expected to go ex-dividend again till next month, but traders don’t have to wait that long to collect an income payment. Last year, one of my colleagues skimmed $46,360 in income from some of the largest firms on Wall Street on stocks just like GlaxoSmithKline. The money was just sitting there for the taking — she simply beat Wall Street to it.  

In her new presentation, she shows average traders how they can do the same. Click here to access it before it comes down.

Recommended Trade Setup:

— Buy GSK at the market price
— Set stop-loss at $40
— Set initial price target at $49 for a potential 16% gain in four months 

This article originally appeared on Profitable Trading: My No. 1 Pick in a Sector on the Verge of a Breakout