CVS Health Up on Earnings but Charts Provide Warnings

Sell CVS Health on strength to its monthly risky level at $77.84. The weekly chart shows a declining 12x3x3 weekly slow stochastic reading, which warns that recent price gains could consolidate.
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Health-care and pharmacy giant CVS Health  (CVS) - Get Report reported better-then-expected Q4 earnings - and while the stock opened higher, it's a sell on strength to its monthly risky level at $77.84.

The pharmacy giant has been a turnaround since mid-June 2019. But the weekly chart shows a declining 12x3x3 weekly slow stochastic reading, which warns of a pending consolidation of recent price gains.

The fourth-quarter beat extends its earnings-per-share winning streak to 16 quarters. The stock is reasonably priced, with a p/e multiple of 9.8 and a dividend yield of 2.7%, according to Macrotrends.

But despite the beat, CVS offered profit guidance below Wall Street expectations. Here’s the detailed analysis of its earnings report as compiled by TheStreet.com.

The Woonsocket, R.I., pharmacy giant has locations in almost every community in the country and its goal is to serve more of consumers' healthcare needs. 

The turnaround story began in November 2018, when CVS's deal to buy Aetna closed. 

As this evolution continues, CVS is expanding its Minute Clinic to more store locations as pharmacies become mini-emergency rooms. 

The stock closed Tuesday at $73.85, down 0.5% year to date and 4.1% below its 52-week high of $77.03. 

The stock is in bull-market territory 43% above its May 17 low of $51.72.

Longer term, the stock is consolidating a bear-market decline of 54% from its all-time intraday high of $113.65, set in July 2015.

CVS is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells CVS? Learn more now.

The Daily Chart for CVS Health

Daily Chart For CVS Health

Daily Chart For CVS Health

Courtesy of Refinitiv XENITH

The daily chart for CVS shows that the stock had been above a golden cross since Sept. 19, when the 50-day simple moving average rose above the 200-day simple moving average. This signaled that higher prices would follow. And it tracked the stock to its Nov. 25 high of $77.03.

The close of $74.20 on Dec. 31 was an important input to my proprietary analytics. The annual risky level for 2020 is above the chart at $110.22. The semiannual value level is below the chart at $49.02. The first-quarter value level is the horizontal line at $58.80.

The close of $67.82 on Jan. 31 was input to my analytics and the monthly risky level for February is $77.84. This week’s value level is $71.53.

The Weekly Chart for CVS Health

The Weekly Chart For CVS Health

The Weekly Chart For CVS Health

Courtesy of Refinitiv XENITH

The weekly chart for CVS is neutral, with the stock above its five-week modified moving average at $72.36. 

The stock is trying to stay above its 200-week simple moving average, or reversion to the mean, at $73.84. The stock has been sliding down this moving average since the week of Nov. 29, when the 52-week high was set.

The 12x3x3 weekly slow stochastic reading is projected to decline to 49.89 this week from 51.18 on Feb. 7.

At the high this reading was 94.46, which put the stock in an inflating parabolic bubble formation. 

During the week of April 26 this reading was 9.71, below the 10 threshold that made the stock too cheap to ignore.

Tracking this indicator enabled investors to capture a major portion of the 2019 bull market for the stock.

Trading Strategy: Buy weakness to its weekly value level at $71.53. Reduce holdings on strength to the monthly risky level at $77.84. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Monthly levels for February were established based upon the Jan. 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at midyear. Annual levels are in play all year long.

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 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 its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

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