After strong earnings results from some of the biggest tech and consumer discretionary stocks on Thursday night, stocks experienced an odd trading session on Friday. The Nasdaq opened sharply higher while the other three indices opened lower or little changed.
All four indices would move lower through the first half of the day and then rallied in the second half. In the end, three of the four ended up gaining ground.
The Nasdaq led the way with a gain of 1.49%.The S&P moved up 0.77% and the down tacked on 0.44%.
The Russell would fail to reach positive ground, but it trimmed its loss to 0.98% at the end of the day.
Six of the 10 main sectors finished higher while four lost ground.
The tech sector was the top performer with a gain of 2.5%.
The consumer discretionary sector gained 1.4% and those were the only two that gained over 1.0%.
The healthcare sector dropped 0.57% as the worst performer and it was followed by the energy sector which fell 0.47%.
My scans turned in a second straight negative result with 28 bearish signals and only seven bearish signals.
The barometer dropped a little once these results were added in to the equation. The final reading on Friday night was -7.8, down from -2.6.
After two straight bullish trade ideas, I have a bearish idea for you today and it is not the typical analysis. The subject company is Merck (NYSE: MRK) as the pharmaceutical company appeared on the bearish list. What is unusual is that the company has strong fundamental ratings with an EPS rating of 87 and an A on the SMR rating scale. Those are the type of ratings we usually see for a bullish trade idea.
The problem for Merck is its chart. The stock has formed a pattern known as three falling peaks. The high in April was at $84.00. The high in June was $82.85 and now it peaked at $81.68 on Friday. Each of the other peaks saw the stock drop just over $9. If the pattern plays out again, the low should be down around the $72.50 level.
Buy to open the October 85-strike puts on MRK at $7.15 or better. These options expire on October 16. I suggest a target gain of 75% for the trade and that means the stock will need to drop to $72.50. The recent pattern suggests that this is a reasonable target. I recommend a stop at $83.50.
— Rick Pendergraft
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