McKesson Corporation (MCK) distributes pharmaceuticals, health information technology and medical supplies, and its earnings report delivered on May 8 beat analysts' earnings per share (EPS) estimates. The stock tested and held its quarterly pivot at $124.10 at Wednesday's open and traded as high as $133.22 during the session.
The stock closed Wednesday, May 8, at $131.70, up 19.2% year to date and in bull market territory at 24.1% above its Dec. 24 low of $106.11. McKesson shares are also in correction territory at 12.9% below the 52-week high of $151.24 set on June 24, 2018.
McKesson is in the middle of the political health care debate in Washington D.C. This includes how to lower drug prices, maintaining profitability while attempting to save money for consumers. As a global company, McKesson is feeling pressures in key regions including the European Union. A positive is the renewal of its distribution partnership with CVS Health Corporation (CVS).
The daily chart for McKesson
The daily chart for McKesson shows that the stock closed 2018 at $110.47. This level was an input to my proprietary analytics, and two important levels remain in play. The stock began 2019 above its semiannual value level at $108.86 and its annual risky level at $209.27, which appears out of reach.
The 2019 high of $137.16 was set on Feb. 19, continuing a positive reaction to earnings released on Jan. 31. The stock reversed direction beginning on Feb. 20 on allegations that the company supplied pharmacies with illicit opioids. The stock closed March 29 at $117.06, which was another input to my analytics that resulted in the second quarter pivot at $124.10. The close of $119.25 on April 30 was another input to my analytics and resulted in a value level for May at $116.44.
The weekly chart for McKesson
The weekly chart for McKesson is positive, with the stock above its five-week modified moving average of $121.71. The stock is below its 200-week simple moving average, or "reversion to the mean," at $155.01, and it has been below this key level since the week of Sept. 16, 2016. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 35.24 this week, up from 27.08 on May 3.
Trading strategy: Buy McKesson shares on weakness to the quarterly pivot and monthly value level at $124.10 and $116.44, respectively, and reduce holdings on strength to the 200-week simple moving average at $155.01.
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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.
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.