Quest Diagnostics Incorporated (DGX) reports earnings before the open on Tuesday, July 23. The stock has been in recovery from a bear market decline of 32% from its all-time intraday high of $116.49 set in June 2018 to its Dec. 26 low of $78.95. The stock ended last week at $99.28, up 19.2% so far in 2019 and in bull market territory at 25.8% above its Dec. 26 low.

Quest Diagnostics provides clinical laboratory services including blood tests. The company continues to modernize its clinics with online improvements in its sign-in procedure and in paperwork reductions. While Quest Diagnostics modernizes its phlebotomy services, it is also closing low-producing clinics.

Quest Diagnostics closed the first half of 2019 on June 28 at $101.81, which became a key input to my proprietary analytics. Left over from the first half of the year is the annual pivot at $93.81, which was crossed to the upside on April 23. The risky level for the second half of 2019 is $116.59. The value level for July is $90.68. The third quarter value level is $85.97.

The daily chart shows a "golden cross," and the weekly chart will likely be downgraded to negative this week. Fundamentally, Quest Diagnostics is reasonably priced with a P/E ratio of 16.04 and a dividend yield of 2.14%, according to Macrotrends.

Quest reports quarterly results before the opening bell on Tuesday, July 23, and analysts expect the company to post earnings per share of $1.70. Wall Street expects operational improvements to accelerate growth. However, second quarter results are expected to decline. The company recently announced a data breach that exposed personal information for up to 11.9 million patients.

The daily chart for Quest Diagnostics

Daily chart showing the share price performance of Quest Diagnostics Incorporated (DGX)
Refinitiv XENITH

The daily chart for Quest shows the formation of a "golden cross" on June 6, when the 50-day simple moving average rose above the 200-day SMA to indicate that higher prices lie ahead. This signal tracked the stock to its 2019 high of $104.20 on July 11. Since then, the stock has faded below its 50-day SMA at $99.70 and above its 200-day SMA at $92.79.

The semiannual risky level is above the chart at $116.58. The horizontal lines show the annual value level at $93.81, the monthly value level at $90.88, and the quarterly value level at $85.97.

The weekly chart for Quest Diagnostics

Daily chart showing the share price performance of Quest Diagnostics Incorporated (DGX)
Refinitiv XENITH

The weekly chart for Quest Diagnostics will be downgraded to negative this week with the stock below its five-week modified moving average of $99.71 and above its 200-week SMA, or "reversion to the mean," at $91.91.

The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 79.60 this week, falling below the overbought threshold of 80.00. At the July 11 high, this reading was 93.87, above the 90.00 threshold as an "inflating parabolic bubble," which is now popping. As 2019 began, the stochastic reading was 8.87, with the reading below 10.00 making the stock "too cheap to ignore." These extreme readings successfully helped traders capture share price volatility.

Trading strategy: Buy Quest Diagnostics shares on weakness to the annual, monthly, and quarterly value levels at $93.81, $90.68, and $85.97, respectively. Reduce holdings on strength to the semiannual risky level at $116.58.

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.

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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

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