A weak stock market and weak profit target announcement combined to send shares of pharmaceutical giant Merck down in Tuesday’s trading. Even though the stock lost more than 2%, it was already hurting.
Since peaking January 19 above 39, Merck is down more than 5%. Compare that to the Standard & Poor’s 500, which is up roughly 2% even after Tuesday’s drubbing.
Making matters worse, the stock has now broken its rising trendline from October and is trading below its key 50-day moving average. Basically what this means is that the rising trend has given way to a correction.
Merck has not been kind to investors over the past two years as it has gone nowhere. If it were not for the healthy dividend, investors would have nothing to show for their risk.
The question is whether the correction has run its course or has more downside ahead. One look at the chart shows that the stock is now at an important long-term price support. Over the past few years, several rallies hit a ceiling at 37.55. So when the stock moved above that level in December 2011, bulls rejoiced and settled in for a nice upside run.
Unfortunately, that was not to be and now the former price ceiling is acting as a floor for the 2012 decline. At its worst levels Tuesday, Merck actually dipped below this key price. If it holds below for one or two more days then chart watchers will consider it to be broken. The bears would then be in firm control.
Of course, if the stock can pull itself up in the next day or two then a stalemate would be in place and we would have to wait for the next signal from the market.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Follow Quick Takes Pro on Facebook.