CVS Health Corporation (CVS) stock has attracted aggressive short selling interest since late October, when it broke 11-month support at $75. The decline posted a three-year low in the upper $60s last week, giving way to a bounce that may issue a major sell signal when it reaches new resistance. In turn, a reversal starting at that level could gain traction, dropping the pharmacy giant's shares into a selling spiral that could eventually reach the upper $40s.

An Oct. 26 report revealed that CVS had entered merger talks with Aetna Inc. (AET). The discussions, apparently intended to ward off, Inc's (AMZN) expansion into online pharmacy management, made little sense to selling shareholders because a protracted merger process is likely to undermine profit and revenue objectives. That cloud may grow even darker if the negotiations bear fruit and U.S. regulatory agencies choose to delay the approval. (See also: CVS-Aetna Deal Prompted by Amazon's Drug Moves.)

CVS Long-Term Chart (1990 – 2017)

The stock topped out at a split-adjusted $12.47 in July 1990 following a multi-year uptrend and sold off to an eight-year low at $5.88 in January 1996. It turned higher into 1997, grinding out a healthy trend advance that reached $29.19 in the first half of 1999, while a 2001 test at that resistance level attracted aggressive selling interest and a double-top breakdown after the Sept. 11 attacks.

The decline found support on top of the 1990 high in November 2001, yielding a successful test two years later, followed by an uptrend that gathered strength through the mid-decade bull market. The rally topped out at $44.29 in 2008 and turned lower during the economic collapse but held well above the 2003 low, demonstrating relative strength that underpinned a recovery wave into the new decade.

The uptick reached the 2008 high in 2012, generating a 2013 breakout that posted the most prolific gains so far this century, more than doubling in price into the July 2015 all-time high at $113.65. The stock sold off during the August mini flash crash, establishing deep support at $81 that finally broke in November 2016, dropping the shares into the upper $60s. A bounce into January 2017 failed to pierce new resistance, while four tests at that level into September also failed to trigger a breakout. (For more, see: How CVS Makes its Money.)

CVS Daily Chart (2015 – 2017)

Two-year price action into late 2016 carved a double-top breakdown that ended the long uptrend, ahead of an early 2017 bounce that confirmed new resistance at the breakdown level. The November 2016 sell gap established support at $69.30, while a mid-year trading range defined a secondary platform at $75. The stock broke that level following the merger news and bounced strongly about three points below the November low, quickly remounting that level.

An oversold bounce may now lift into a test of broken support, with a reversal at or near $75 likely to set off major sell signals. Short sellers capitalizing on the subsequent decline may have to choose between quick profits, taking an exit on the test in the upper $60s, or rolling the dice in expectation of a larger-scale breakdown that could reach the declining lows trendline in the upper $50s. In the longer term, an escalating downtrend could reach the top of the 2008 high in the mid-$40s.

On-balance volume (OBV) may offer a stiff tailwind for short sellers, entering a persistent distribution wave in the second half of 2015, with forceful selling pressure continuing into November 2016. The indicator dropped to a multi-year low in October 2017, in sympathy with bearish price action, and has now bounced, but long-term technical damage favors an eventual breakdown. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

CVS shareholders are dumping positions aggressively in reaction to Amazon's foray into online prescriptions as well as anxiety generated by the company's pursuit of a merger with health care giant Aetna. A bounce into new resistance in the mid-$70s could attract a major bear raid, triggering a reversal and renewed decline that could break 2016 support in the upper $60s. (For additional reading, check out: CVS Launches Next-Day Delivery to Counter Amazon.)

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