Merck & Co., Inc. (MRK) beat third quarter earnings estimates before the opening bell on Tuesday, Oct. 29, but the stock ended the week with a "key reversal" day on Friday, Nov. 1. Merck shares traded as high as $87.24 on Friday and then closed the week at $84.94, below Thursday's low of $85.51 and below the new monthly pivot at $85.80.

The pharmaceutical giant and component of the Dow Jones Industrial Average beat saw a positive reaction to earnings on a surge in sales of its top two blockbuster prescription drugs, including cancer drug Keytruda. Merck raised guidance but at the same time warned that it faces political pressures to reduce drug prices next year.

The stock was been a solid performer so far in 2019 with a gain of 11.2% year to date and is up 19.8% since trading as low as $70.89 on Dec. 24. The stock is reasonably priced with a P/E ratio of 17.09 and a dividend yield of 2.54%, according to Macrotrends.

The daily chart for Merck 

Daily chart showing the share price performance of Merck & Co., Inc. (MRK)
Refinitiv XENITH

The daily chart for Merck shows a "golden cross" that was confirmed on June 12, 2018, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow, and they sure did. Under this positive signal, the strategy is to buy weakness to the 200-day simple moving average, which was doable at $73.53 on April 18, 2019, and again during the week of Sep. 10 and as October came to an end.

The close of $76.41 on Dec. 31 was input to my proprietary analytics, and the annual pivot remains at $76.46. This level was a magnet between Jan. 4 and April 30. The close of $83.85 on June 28 was another input to my analytics and resulted in the semiannual value level at $75.17. The close of $84.18 on Sep. 30 was the input that resulted in the fourth quarter value level at $81.34. The close on Oct. 31 at $86.66 was the most recent input, and it resulted in the monthly pivot for November at $85.80.

The weekly chart for Merck

Weekly chart showing the share price performance of Merck & Co., Inc. (MRK)
Refinitiv XENITH

The weekly chart for Merck is neutral, with the stock above its five-week modified moving average of $84.16. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $65.74. The 12 x 3 x 3 weekly slow stochastic reading fell to 62.51 last week, down from 63.75 on Oct. 25.

Trading strategy: Buy Merck shares on weakness to the quarterly, annual, and semiannual value levels at $81.76, $76.46, and $75.17, respectively, and reduce holdings on strength to the monthly pivot at $85.80.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Oct. 31 established the monthly level for November.

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.

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