Dow component Merck & Co., Inc. (MRK) ended more than four years of laggard behavior in the second half of 2018, turning sharply higher in a positive feedback loop that has now lifted shares of the pharmaceutical giant to an 18-year high. More importantly, Merck stock has finally entered a long-awaited test at the November 2000 all-time high at $91.51, setting the stage for an eventual breakout into the triple digits.

The stock is sidestepping endless malaise in the pharmaceutical sector, which has struggled since 2015 pricing scandals with Valeant Pharmaceuticals, now trading as Bausch Health Companies Inc. (BHC), and hedge fund manager Martin Shkreli, who is serving a seven-year sentence for securities fraud. Political parties are united in the need for drug price controls, keeping a lid on revenue growth that encouraged major abuse earlier this decade.

However, all-time highs from prior eras mark major resistance levels that have the power to end long-term uptrends. The stock is now trading above $83, or less than nine points under the 2000 high, making it difficult to take fresh exposure due to the threat of a reversal. A pullback into support in the lower $70s would shift this equation in favor of bulls, as would a rapid advance into the triple digits.

MRK Long-Term Chart (1992 – 2019)

Long-term chart showing the share price performance of Merck & Co., Inc. (MRK)

The stock ended a multi-year uptrend at a split-adjusted $26.75 in January 1992 and entered a shallow downtrend that found support in the low teens in 1994. The subsequent uptick completed a round trip into the prior high 15 months later, yielding an immediate breakout that attracted strong buying interest. The rally posted impressive gains into the second half of 2000, topping out at an all-time high above $90, ahead of a decline that hit a five-year low in the mid-$30s in 2002.

A bounce into 2003 got sold aggressively, generating a 2004 breakdown that ended at a nine-year low one year later. Committed buyers completed a 100% retracement into the 2003 high in 2007, prompting a sell-off to a 12-year low after the 2008 economic collapse. That marked the end of the nine-year downtrend and a major buying opportunity, ahead of a recovery wave that took five years to reach 2003 and 2007 resistance in the $60s.

The stock struggled below that formidable barrier for another four years, finally breaking out in the second half of 2018 and booking impressive gains through the first quarter of 2019. The rally also mounted the .786 Fibonacci sell-off retracement level in February, clearing the final harmonic barrier before reaching resistance at the all-time high. However, it's still testing new support, exposing long positions to a potential pattern failure.

The monthly stochastics oscillator entered a long-term buy cycle in April 2018 and reached the overbought level in September. It has now crossed into a long-term sell cycle, predicting that profit-taking will soon overcome buying power, but price action isn't showing this structural weakness. As a result, the signal could easily fail, especially if the stock posts another round of new highs.

MRK Short-Term Chart (2017 – 2019)

Short-term chart showing the share price performance of Merck & Co., Inc. (MRK)

The on-balance volume (OBV) accumulation-distribution indicator tested the 2007 high in 2018 and turned lower, hitting a six-month low in January. Buying power since that time hasn't reached the prior high, generating a minor bearish divergence that might need a consolidation or downturn to overcome. A pullback to the 50-day exponential moving average (EMA) near $80 might accomplish that task, but a better opportunity may come after price action fills the Feb. 1 gap between $75 and $76.

The pattern since April 2018 has drawn a rising lows trendline with three successful tests, while a decline into the mid-$70s would bring that level into play once again. The line is located at the midpoint between the 50- and 200-day EMAs, ready to offer actionable information about structural strength or weakness during a pullback. A trendline break that stretches into the 200-day may offer the most advantageous scenario for bulls, generating a major buying opportunity.

The Bottom Line

Merck has finally entered a long-awaited test at the all-time high, posted after the internet bubble burst more than 18 years ago.

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