Eli Lilly May Need a Deep Pullback Before Its Rally Can Resume

NEW YORK (TheStreet) -- Pharmaceuticals manufacturer Eli Lilly  (LLY) now appears to have put in a significant high last week. Its rally has stalled ahead of what could be a deep pullback.

The stock stretched its powerful rally off the May low to 22% when it hit $87 last Thursday. Since then, Eli Lilly has been churning as it drifts below what is now taking shape as a significant spike high. A deep pullback may be needed before shares return to rally mode. A fade back down to the May high at $79.50 would offer a low-risk buying opportunity for Eli Lilly bulls.

This week, Eli Lilly reached an overbought reading on its weekly moving average convergence/divergence indicator that has not been seen since 2000. This MACD reading illustrates just how powerful the bull trend has been over the last eight weeks. Last Tuesday, after investors digested positive news on its diabetes treatments, Eli Lilly entered a major accumulation phase. Upside exploded for three straight days despite the big rise in price.

This overdone action will need to be corrected, at least partially, before the June high can be convincingly cleared.

Eli Lilly has held support near $83 this week. This was the high of the initial thrust of last Tuesday. If this key near-term level is violated, a retest of the May peak is likely. For patient bulls, a test of the May peak at $79.50 will be a very low-risk buying opportunity. This would complete a rather deep pullback but is probably necessary considering the extent of the overbought MACD reading.

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This article is commentary by an independent contributor. At the time of publication, the author was long LLY.

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