Chart of the Week – Merck & Co.

Screen Shot 2019-01-14 at 4.25.13 PM.pngSource: thinkorswim

Merck & Co. (MRK) is an American pharmaceutical company. With a market cap of approximately $200 billion, Merck & Co. is one of the largest pharmaceutical companies in the world.

As can be seen in the chart above there has been a clear upward channel spanning from the stocks 52-week low in early April up its peak price of $80.19 in early December. Shortly after we see this 52-week high on December 4th, there appears to be a reversal in trend. A new downward trend appears in which both resistance and support appear to be sloping down. We are now at a critical point for this stock in which the next few days could determine its momentum moving forward from a strictly technical perspective. The stock is currently trading at the line marking its support over the last eight months. If the stock were to continue with eight-month trend it will bounce off of support with multiple positive days this week and begin to approach resistance. This resistance would mean a price target of approximately $84-$85. However, we can also look at this chart and determine that the previous upward trend has been broken due to multiple occasions of failing to reach resistance before reverting back to the line of support. We have a difficult time determining if this is a true reversal in trend due to the fact that at no point did the stock price dip below our sturdy line of support.

The more risk-tolerant investor may take this information and buy the stock if they believe it has not reversed trend or short the stock if they believe the trend has reversed and lower-lows are to follow. However, I am more risk-averse and a speculative trade like this is not how I invest. If one were to make a swing trade on this stock I would advise that they wait at least one or two days in order to seek more clarity on the direction of this trend.

I believe that this stock has reversed trend and will continue downwards through support over the next few days. I have inferred this because I think that the market has valued this stock at too high a multiple and it is time for the price to come back to a more conservative valuation. With a P/E ratio of 34 I would need to see very promising financials in order to rationalize buying this stock and I am simply not seeing it. The debt/equity ratio of .73 is too high for my liking and I would like to see greater capital expenditures as the company invests in its growth. However, this is a stock that I will certainly keep my eye on. If it crosses down through support this week, as I believe it will, this stock could fall significantly up towards its earnings report on February 1st. If this stock reaches a more conservative valuation, represented by a P/E ratio closer to 20 I will take another look. At a P/E closer to 20 this stock could prove valuable due to its consistent increases in dividend payouts over the last 15 years and impressive ability to generate cash.

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