The world's largest medical device company Medtronic plc (MDT) reported better-than-expected earnings before the opening bell on Aug. 25. The stock dipped but held its 200-day simple moving average (SMA) at $102.25. The rebound tested its quarterly pivot at $108.49 between Aug. 31 and Sept. 16.

Key Takeaways

  • Medtronic plc (MDT) exceeded earnings expectations when it reported results on Aug. 25.
  • The medical device maker has beaten earnings estimates in three of the past four quarters.
  • If the strength in Medtronic shares continues, a golden cross signal will occur, suggesting additional upside potential.

Medtronic stock closed Wednesday, Sept. 16, at $107.49, down 5.3% year to date and in correction territory at 12% below its Jan. 22 all-time intraday high of $122.14. The stock is also in bull market territory at 49% above its March 18 low of $72.13.

Medtronic is surviving currency fluctuations and sees strong demand for its ventilators needed to treat victims of COVID-19. The company has beaten earnings per share (EPS) estimates in three of the past four quarters. Its P/E ratio is 27.23 with a dividend yield of 2.16%, according to Macrotrends.

The daily chart for Medtronic

Daily chart showing the share price performance of Medtronic plc (MDT)
Refinitiv XENITH

The daily chart for Medtronic shows the stock consolidating a bear market decline of 40.9% from the high of $122.14 on Jan. 22 to the low of $72.13 on March 18. This was followed by a bull market rise of 50.4% to its quarterly pivot at $108.49.

The stock fell below its 50-day SMA on Feb. 18. The 200-day SMA failed to hold on Feb. 26. This led to the March 18 low of $72.13. On the V-shaped recovery, Medtronic rebounded to its 50-day SMA on April 7. The 200-day SMA was not tested until Aug. 12. The stock has been above the 200-day SMA since Aug. 25.

The stock is well below its annual risky level at $121.17. It is between its weekly value level at $104.86 and its quarterly pivot at $108.49. The downside risk is to the semiannual and monthly value levels at $93.57 and $87.80. If strength continues, a golden cross will occur when the 50-day SMA rises above the 200-day SMA to indicate that higher prices will follow.

The golden cross is a technical chart pattern indicating the potential for a major rally. The pattern appears on a chart when a stock's short-term moving average crosses above its long-term moving average.

The weekly chart for Medtronic

Weekly chart showing the share price performance of Medtronic plc (MDT)
Refinitiv XENITH

The weekly chart for Medtronic is positive but overbought, with the stock above its five-week modified moving average of $102.68. The stock is well above its 200-week SMA, or reversion to the mean, at $91.23. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 81.60, up from 80.11 on Sept. 11.

Overbought is a term used when a security is believed to be trading at level currently above its intrinsic or fair value. Overbought generally describes recent or short-term movement in the price of the security and reflects an expectation that the market will correct the price in the near future.

Trading strategy: Buy Medtronic stock on weakness to its semiannual and monthly value levels at $93.57 and $87.80. Reduce holdings on strength to the annual risky level at $121.17. The quarterly pivot at $108.49 should remain a magnet.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The third quarter 2020 level was established based upon the June 30 close, and the monthly level for September was established based upon the Aug. 31 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and the lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.