Pharma giant Merck (MRK - Get Report) is showing a particularly auspicious technical setup right now -- an inverse head-and-shoulders pattern. The head-and-shoulders pattern is probably one of the most well-known technical formations out there today, but just because it's popular doesn't mean it's not effective. A recent academic study on the head-and-shoulders show that the formation can be both statistically and economically significant for traders.
In Merck's case, the key price level to watch is the neckline. It's the price level that triggers the "buy" signal in this setup. Because an inverse head-and-shoulders indicates exhaustion among sellers, it'll be important to watch volume if shares to make their way above the neckline. We'll want to see any breakout occur on high volume.
If you do decide to take this trade, I'd recommend placing a protective stop just below the 200-day moving average. It's a price that recently acted as strong support for shares.Merck, one of the highest-yielding drug stocks, was featured recently in " David Tepper's Top 5 Dow Stocks."