CVS Health (CVS) was giving investors a potentially ugly trading setup on Tuesday, down about 4% after reporting earnings.
However, it’s the daily price that’s forming a concerning look. Shares are knifing right through several key moving averages while giving investors a bullish engulfing candle.
Without getting too technical, that occurs when the current candle opens above the prior day’s close, and closes below the prior day’s open. Ideally, the entire range of the second candle exceeds the range of the previous candle.
In other words, the candle is "engulfing" the prior day. It’ll be illustrated on the chart below.
While it’s still early in the week, CVS could also be setting up for a bearish engulfing weekly setup too.
Shares were selling off despite CVS topping fourth-quarter earnings and revenue expectations. However, full-year guidance for 2021 was slightly short of estimates.
Is that worth this type of dip? Let’s look at the chart.
Notice how shares opened above the prior day’s range (including its high), then completely blew through the lows of the prior day. That’s not a great look. Nor is the fact that CVS stock dipped aggressively below the 50-day moving average.
Thankfully, VWAP support is stepping on the day. If shares can bounce off this level, it will at least give traders a downside level to measure against.
That support level will become even more compelling if CVS can reclaim the 50-day moving average. Should the 10-day and 50-day moving averages act as resistance, VWAP support will be vulnerable as bears harness control of the stock — at least in the short term.
What if the VWAP measure doesn’t act as support?
In that event, uptrend support (blue line) will be put in play, followed by the $67 to $68 area. Near the latter range, the stock finds its 100-day and 200-week moving averages. Reclaiming the latter was a significant development for long-term bulls, so to see it act as support would be a reaction to keep note of.
On the upside, let’s see if CVS stock can reclaim the 50-day moving average. Above it could put $74 in play, followed by a potential test of the $77 area, which is the 2019 high and a mark that wasn’t tested in 2020. However, it was resistance in January.
Here’s the bottom line: If the stock doesn’t hold current levels, look for a dip to the $67 to $68 area. In either scenario, bulls need to reclaim the 50-day moving average to get back in control, then clear $74.