Merck & Co., Inc. (MRK) reported better-then-expected earnings on April 30, and the stock responded with an upside move. This rebound was helped by a “golden cross” on its daily chart, while the weekly chart is neutral.
Merck is a component of the Dow Jones Industrial Average and was a member of the “Dogs of the Dow” in 2018. The company did not qualify in 2019, as it has a P/E ratio of 17.45 with a dividend yield of 2.79%, according to Macrotrends. To qualify as a member of the dog pound, the dividend must be above 3.00%.
Merck stock closed Wednesday, May 1, at $78.72, up 3.00% year to date and up by a bull market 39.9% from its low of $56.26 posted on May 9, 2018. The stock is 6.1% below its high of $83.85 set on April 1, 2019.
The daily chart for Merck
The daily chart for Merck shows that a “golden cross” has been in play since June 12, 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 input to my proprietary analytics and resulted in a semiannual value level at $67.68 and an annual pivot at $76.46. The close on March 29 at $83.17 was an input that generated a quarterly value level at $72.74. The close of $78.71 on April 30 resulted in a monthly risky level at $86.21.
The weekly chart for Merck
The weekly chart for Merck is neutral, with the stock above its five-week modified moving average of $78.58. The stock is well above its 200-week simple moving average, or “reversion to the mean,” at $61.94. The 12 x 3 x 3 weekly slow stochastic reading is projected to fall to 52.71 this week, down from 61.33 on April 26.
Trading strategy: Buy Merck shares on weakness to the annual, quarterly and semiannual value levels at $76.46, $72.74 and $67.68, respectively, and reduce holdings on strength to the monthly risky level at $86.21.
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.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.