Merck & Co., Inc. (MRK) beat second quarter earnings estimates before the opening bell on Tuesday, July 29, and the stock tested its monthly risky level at $86.45 at its pre-market high. The pharmaceutical giant and component of the Dow Jones Industrial Average beat expectations on the top and bottom lines and raised forward guidance.
Sales of Merck's Keytruda immunotherapy drug that boosts the immune system to fight cancer surged to $2.6 billion. These results occurred even though the company faces pressure from the White House and Congress to reduce prices on prescription drugs.
The stock was already a solid performer so far in 2019 with a gain of 8% year to date at Monday's close of $82.49. The stock is in bull market territory at 24.8% above its Oct. 25 low of $66.10. Merck stock set an all-time intraday high of $87.07 on July 3. The stock is reasonably priced with a P/E ratio of 18.06 and a dividend yield of 2.70%, according to Macrotrends. The company extended its winning streak of beating earnings per share estimates to 22 consecutive quarters.
The daily chart for Merck
The daily chart for Merck shows that a "golden cross" was confirmed more than 52 weeks ago on June 12, 2018, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. 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.
The close of $76.41 on Dec. 31 was an important 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 key input to my analytics and resulted in quarterly and semiannual value levels at $76.73 and $75.17, respectively, and a risky level for July at $86.45, which was tested before the opening bell on July 30.
The weekly chart for Merck
The weekly chart for Merck is neutral, with the stock above its five-week modified moving average of $82.11. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $63.67. The 12 x 3 x 3 weekly slow stochastic reading is projected to fall to 60.67 this week, down from 64.63 on July 25.
Trading strategy: Buy Merck shares on weakness to the quarterly, annual, and semiannual value levels at $76.73, $76.46, and $75.17, respectively, and reduce holdings on strength to the monthly risky level at $86.45.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.
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.