Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Chart of the Day: Merck to Spike to $115?

Published 11/08/2022, 08:15 AM
Updated 07/09/2023, 06:31 AM

Drugmaker Merck's (NYSE:MRK) stock has outperformed its competitors year to date (ytd), rising 30.6%. Pfizer (NYSE:PFE), which I am bearish on, is down 16.9% so far this year. The Rahway, New Jersey-based firm's biggest sellers included melanoma-treating KEYTRUDA, the human Papillomavirus vaccine, Gardasil, and Bridion which is used to speed up the recovery from a muscle relaxant, usually at the end of a surgical procedure.

The future looks exceptionally bright for KEYTRUDA as the US Food and Drug Administration (FDA) has approved expanded indications for the drug.

At $100.07, MRK is down 1.4% since its Oct .27 all-time high (ATH) of $101.50. The stock increased 1.35% that day after the company reported earnings and revenue ahead of expectations. Moreover, the pharmaceutical multinational raised its full-year forecast. Yet, the stock pared that day's much sharper rally of 3.14% and has been ranging with a downward bias since then. What gives?

Investors don't buy a stock based on its current value, they buy it based on its future value. That is behind the old Wall Street adage, "Buy the rumor, sell the news." That is why stocks often sell off on good news because investors have already priced it in the news so they sell to lock in profits.

Now let us examine Merck's chart.

Merck Daily
The stock peaked on earnings day. It had rallied ahead of the report as some investors had bought the rumor of good results. Once the figures were released shareholders realized profits before they might have dissipated.

However, note that the trade since then has been very crowded. There is no meaningful decline. Look at the preceding sharp advance to appreciate that the current 'decline' is a sign of health. Otherwise, the stock would have slumped at the same rate it rallied. That's because, for every bull exiting, another bull has been taking his place.

The upside breakout will prove that demand soaked up supply and wants more. That penetration could release a tightly wound spring, powered by a short squeeze and triggered longs that will propel the price higher.


Technicians measure the 'flag pole' which is the sharp move that sets up the flag. However, that is what you'll find in textbooks. In real life, it's trickier to determine when the activity actually began. That is something only experience can teach. We have two possibilities for the movement's beginning:

  1. Conservative: Include the five days preceding the flag, when stocks advanced in a straight line. Measure from the Oct. 19 low of $92.36 to the $101.50 ATH, giving us a projected $9.14 move from the point of breakout.

  2. Aggressive: A more liberal interpretation of the move, including a few pauses from the $87.11, Oct 7 low to the $101.50 ATH, providing an expected $14.39 move from the point of pattern completion.

The reason technicians expect the move to be repeated is that traders' interest in the stock remains either because of market mechanics—their order positioning—or because of psychology—fear or greed.

The stock found resistance at the psychological $100 level after fulfilling the preceding failed double top/symmetrical triangle's implied target, as measured by its height.

Chart analysis is about finding the supply and demand pressure points, which either turn to resistance when there is more supply or to support as demand triggers a chain reaction.

Trading Strategies

Conservative traders should wait for an upside breakout, with a minimum 3% and 3-day filter, to avoid a bull trap before risking a long position. Then, they'd wait for a return move to confirm the flag's support.

Moderate traders would commit to a long position with a 2%, 2-day filter. They, too, would wait for a pullback, for an entry closer to the flag's presumed support, if not for trend confirmation.

Aggressive traders could enter a contrarian short, as the price is near the top of the pattern, hoping to ride another downward correction, then go long from its bottom.

Trade Sample - Aggressive Contrarian Short

  • Entry: $100.50
  • Stop-Loss: $101.00
  • Risk: $0.50
  • Target: $98.00
  • Reward: $2.50
  • Risk-Reward Ratio: 1:5

Disclaimer: The author does not hold a position in any of the assets mentioned.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.