This Stock Is Defying the Bears

The first trading day of 2017 was a mixed session. Although the broader indices ended higher on the day, underneath the surface, things traded in a sloppy fashion. Healthcare stocks lead the bounce, however, and Merck & Co., Inc. (NYSE:MRK) in particular caught my eye.

See, healthcare stocks struggled in 2016’s second half, at least in part due to regulatory concerns around where a new U.S. administration will come down on them.

Donald Trump’s victory seemed to bring a little more clarity to the picture, though that didn’t last for long.

But on Tuesday, MRK stock bounced off a technically important level — plus, shares look ripe for additional buying pressure.

Before digging into the charts of Merck stock, let me reiterate that the first two trading weeks of January (basically through Jan. 15) typically exhibit some of the most volatile price action, and with a downward bias.

As such, while what I’m about to present is a valid trade idea, in the name of risk management, I think it would be prudent to trade with reduced size and well-defined stop-losses in place.

Merck next reports earnings on Feb. 2, which given the potential regulatory overhang may only be marginally important as to the stock’s intermediate-term direction. Still, for MRK stock, this is a date to circle.

MRK Stock Charts
First, let’s look at the multiyear weekly chart.

We can see here that despite the sharp rally off the 2009 financial crisis lows, MRK stock over the past couple of years has continued to struggle overcoming the $60-$65 area (blue band on the chart) on a sustainable basis.

However, through this lens, the stock’s choppy sideways action over the past couple of years could also be looked at as constructive consolidation, which ultimately should resolve the stock higher.

Note that despite a couple of years of sideways price action from this perspective, MRK stock has managed to hold its 2009 support lines intact.

Last August, shares of Merck competitor Bristol-Myers Squibb Co (NYSE:BMY) dropped sharply after the company said a trial for once-promising lung cancer drug Opdivo failed. This gave MRK stock a bounce, but as is evident on the chart, there was little follow-through buying.

Another rally in Merck appeared following America’s presidential election results, but that rally too was short-lived. At the same time, MRK has experienced three selloffs since last October, and each one managed to find support in the high $50s, which is what once again took place yesterday.

On the last trading day of 2016, MRK stock once again reached the high $50s, but this was quickly overcome with a nice rally day yesterday as the stock bounced off horizontal support. Now, shares sit back above their red 200-day moving average.

While one day does not make a trend, any follow-through buying could put Merck back in the $62 area in the near future. Traders have a very well-defined stop-loss area around $58.50.

— Serge Berger

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Source: Investor Place