Merck Jumps Into Covid Medicine Search - Here's the Trade

Buy Merck on weakness to its 200-week simple moving average and reduce on strength to 200-day SMA.
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Merck  (MRK) - Get Report unveiled partnerships to search for two vaccines and an oral medication to prevent and treat coronavirus. 

The Kenilworth, N.J., drug giant had been on the sidelines in the development of covid-19 solutions. For more details view this coverage as prepared by TheStreet.com.

The stock on Tuesday opened higher but stayed below its monthly pivot at $79.44.

The stock open Tuesday was $78.26, down 14% year to date and in correction territory 16% below its all-time intraday high of $92.84 set on Dec. 20. 

MRK is also up 20% from its March 23 low of $65.25.

The stock is relatively cheap with a p/e multiple of under 14 and a dividend yield of 3.19%, according to Macrotrends.

Merck has an excellent track record when it comes to earnings. It has beaten earnings-per-share estimates in 25 consecutive quarters. Its latest earnings report was released on April 28.

The Daily Chart for Merck

Daily Chart for Merck

Daily Chart for Merck

Courtesy of Refinitiv XENITH

Merck had been above a golden cross since June 12, 2019. That's when the 50-day simple moving average rose above the 200-day simple moving average. 

This buy signal indicated that higher prices would follow.

When a stock is above a golden cross, the trading strategy is to buy weakness to the 200-day SMA. This was doable three times between Sept. 10 and Oct. 28.

This tracked the stock to its all-time high of $92.64 on Dec. 20.

The cascade lower put the stock below its annual and semiannual pivots at $89.87 and $89.34 on Jan. 23.

The stock fell below its 50-day SMA on Feb. 5. It then broke below the 200-day SMA on Feb. 12.

A death cross occurred on March 16 when the 50-day SMA fell below the 200-day SMA. This tracked the stock to the March 23 low of $65.25.

The V-shaped rebound reached the 200-day SMA between April 17 and April 27 as an opportunity to reduce holdings.

Merck is now between its 50-day SMA at $77.43 and its 200-day SMA at $83.37. 

It is also below its monthly pivot at $79.44.

The Weekly Chart for Merck

Weekly Chart for Merck

Weekly Chart for Merck

Courtesy of Refinitiv XENITH

The weekly chart for Merck is neutral, with the stock below its five-week modified moving average of $78.46. 

The stock is above its 200-week simple moving average, or reversion to the mean, at $70.02.

The 12x3x3 weekly slow stochastic reading is projected to rise to 62.81 this week from 61.19 on May 22.

Trading Strategy: Buy Merck on weakness to its 200-week simple moving average at $70.02 and reduce holdings on strength to the 200-day simple moving average at $83.37.

How to use my value levels and risky levels:

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

The second quarter 2020 level was established based upon the March 31 close.

The monthly level for May was established based upon the April 30 close.

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 mid-year. 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.