CVS Health Corporation (CVS) stock fell more than 7% following Wednesday's pre-market earnings release after the company beat fourth quarter profit and revenue estimates by small margins. Aggressive sellers hit the bid after the health care giant sharply lowered fiscal year 2019 earnings per share (EPS) guidance, most likely due to operating challenges generated by the recent Aetna acquisition.

The company completed the $70 billion acquisition in November 2018, and it's likely to take months or years before synergies at the combined operation can be fully exploited. Early analyst estimates of cost savings and profitability may be too high, given major differences in business cultures, objectives and operating systems, while underplaying the potential for unforeseen obstacles.

CVS Long-Term Chart (1990 – 2019)

Long-term technical chart showing the share price performance of CVS Health Corporation (CVS)
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A multi-year uptrend topped out at a split-adjusted $12.47 in 1990, giving way to a persistent downtrend that found support near $6.00 in 1996. The subsequent uptick gathered strong momentum, breaking out in 1997 and continuing to post impressive gains into the first quarter of 1999, when the rally ended in the upper $20s. A proportional pullback reached the lower teens in 2000, while a 2001 breakout attempt failed two points above the prior high.

The stock broke the 2000 low after the Sept. 11 attacks and settled at a six-year low near $11.00 in 2003, marking the lowest low in the past 16 years, ahead of a bounce that mounted the prior highs in 2006. The breakout failed to gain traction, topping out in the mid-$40s, while the subsequent decline exhibited resilience during the 2008 economic collapse. This relative strength underpinned a 2011 buying surge that presaged exceptional returns into August 2015's all-time high at $113.65.

The mini-flash crash just three weeks later dumped the stock to $81, yielding a bounce followed by a breakdown after the 2016 presidential election. It fell to a four-year low in the first quarter of 2018 and turned higher in a recovery wave that stalled under the January swing high in November. Although the stock has held above the early 2018 low into 2019, the long sequence of lower highs and lower lows tells us that the three-year downtrend remains fully intact.

The monthly stochastics oscillator crossed into a sell cycle in November 2018 after the prior buy cycle failed to reach the overbought level, predicting that bears will retain control into the second quarter. This raises the odds that the 2018 low will break, generating additional downside into the 200-month exponential moving average (EMA), which has aligned at the .618 Fibonacci retracement level of the 2009 to 2015 uptrend in the mid-$50s. The stock has traded above that line in the sand for the past 16 years.

CVS Short-Term Chart (2016 – 2019)

Short-term technical chart showing the share price performance of CVS Health Corporation (CVS)
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The October 2016 gap between $85 and $87 (red lines) has ended multiple rally attempts in the past two years, while the decline into December 2018 found support just two points above the March low. The post-news sell-off signals a rejection at 200-day EMA resistance near $71, finding initial support under $65, which keeps the three-week trading range intact. Given this constriction, buy and sell signals could generate more smoke than fire as long as price holds between the green moving average and black trendlines.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in 2015 and entered an aggressive distribution phase, grinding lower into May 2018's five-year low. Speculators built long positions into the Aetna acquisition and sold their stakes aggressively after the November approval. This has dumped the indicator into the midpoint of the nine-month range, signaling apathy in line with relatively narrow price action. However, bears retain a long-term advantage in this chart structure due to the active multi-year downtrend.

The Bottom Line

CVS stock is trading sharply lower after fourth quarter earnings, with reduced guidance reflecting a more realistic view of operating issues generated by the 2018 Aetna acquisition.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.