Merck & Co., Inc. (MRK) beat quarterly earnings estimates before the opening bell on April 28, and the stock stayed below its 200-day simple moving average (SMA) at $83.79. The stock ended last week below its monthly risky level for May at $79.44.

The pharmaceutical giant and component of the Dow Jones Industrial Average beat earnings estimates for the 25th consecutive quarter, and the stock is relatively cheap. Merck has a P/E ratio of 14.51 with a dividend yield of 3.08%, according to Macrotrends.

The stock closed last week at $79.34, down 12.8% year to date and in correction territory at 14.4% below its 52-week high of $92.64 set on Dec. 20, 2019. The stock is also in bull market territory at 21.8% above its March 23 low of $65.25.

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 that the stock has been under the influence of a golden cross that was confirmed on June 12, 2018, when the 50-day SMA rose above the 200-day SMA to indicate that higher prices would follow. The chart shows that the 200-day SMA held on weakness between Sept. 10 and Oct. 28, which led to the Dec. 20 high at $92.64.

Merck stock began 2020 above its semiannual and annual pivots at $89.34 and $89.87, respectively, but stayed below its quarterly risky level, which is above the chart at $101.99. The stock began to cascade lower on Jan. 23 when these levels failed to hold.

It broke below its 200-day SMA on Feb. 12, which led to the March 23 low of $65.25. The rebound was a return to the 200-day SMA between April 17 and April 27, which was followed by weakness below its monthly pivot for May at $79.44.

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 below its five-week modified moving average of $79.61. The stock is above its 200-week SMA, or reversion to the mean, at $69.74. The 12 x 3 x 3 weekly slow stochastic reading rose to 56.62 last week, up from 51.03 on April 24.

Trading strategy: Buy Merck shares on weakness to the weekly value level at $73.09 and reduce holdings on strength to the 200-day simple moving average at $83.79.

How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain 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 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.