But a price breakout may actually be just around the corner for the Kenilworth, N.J., company..
Merck posted solid first-quarter numbers: Excluding one-time items, Merck earned $1.50 a share, besting Wall Street’s average estimate of $1.34.
But the firm gave muted guidance on projections that fewer routine doctor visits will result in lowered prescription drug sales.
Likewise, Merck expects the brunt of the covid-19 impact to hit this quarter.
Given the guidance cut, Merck stock is holding up relatively well today. That’s due in large part to the fact that investors came into earnings season expecting the worst. And that’s reflected in Merck’s price chart right now.
At the same time, Merck has performed strongly in recent months, buoyed by increased demand as patients stock up on prescriptions and the firm works on covid-19 projects with commercial potential. That recent stock performance matters a lot for Merck right now.
Prior crisis-investing environments over the past three and a half decades show that stocks that have positive six-month relative strength saw a 78.4% chance of a positive one-month return.
That’s about a 50% higher win rate than the average S&P 500 stock, and it’s good reason not to count out Merck for 2020.
To figure out how to trade it from here, we’re turning to the chart for a technical look.
During the covid-19 selloff Merck has been setting up a pretty textbook example of a long-term reversal pattern.
The shares are currently forming an inverse-head-and-shoulders pattern, a price setup that signals exhaustion among sellers.
Don’t let the dumb name fool you – the head-and-shoulders pattern is an effective trading setup.
A 20-year academic study conducted by the Federal Reserve Bank of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
For Merck, the breakout comes on a push above $84.
One benefit of the trading setup in Merck right now is well-defined risk/reward. A relatively shallow shoulder line compared with this stock’s March lows mean that you’ll know quickly if the thesis breaks.
The 50-day moving average has been a good proxy for right-shoulder support since the start of the month. That makes it a logical place to park a protective stop below.
If Merck can manage a material move through $84 in the sessions ahead, then a retest of prior highs just above $92 becomes likely.