Merck Stock Could Rise 30% in Coming Months

Merck & Co., Inc. (MRK) is challenging Apple Inc. (AAPL) and Nike, Inc. (NKE) for the top slot in Dow component performance after years of sub-par returns. This awakening bodes well for strong upside into the next decade, even though the pharmaceutical giant faces a final hurdle at the November 2000 high before joining mega-cap peers at all-time highs. That won't matter for now, with more than 30% upside into that resistance level.

The stock broke out above 17-year resistance in the low to mid-$60s last week, riding high after upbeat July earnings and expanded labeling for KEYTRUDA (pembrolizumab), a key lung cancer drug. It appears that investors have finally shaken off anxiety that the Trump administration will impose price controls and reduce exclusivity rights that dampen profits and revenues. In addition, the broad sector now offers a safe haven against a trade war because life-saving drugs are unlikely to show up on international tariff lists. (See also: Why Health Care Stocks Are Outshining the Techs.)

MRK Long-Term Chart (1991 – 2018)

A three-year uptrend ended at $26.75 in 1991, giving way to a correction that found support at $13.31 in 1994. The subsequent uptick mounted the prior high in the second half of 1995, generating a powerful trend advance that posted an all-time high at $91.51 in November 2000. It broke down from a multi-year double top pattern in June 2002, entering a downtrend that continued into the fourth quarter of 2004, when selling pressure eased in the mid-$20s.

The stock tested that level nearly one year later, turning higher in a double bottom reversal that presaged a strong rally into the 2008 high at $61.09. That peak joined forces with the 2003 swing high (blue line), establishing a horizontal resistance level that ended rally waves until last week's impressive breakout. Merck shares turned sharply lower with world markets during the economic collapse, breaking the 2002 low before coming to rest at 13-year low near $20.

The subsequent bounce finally completed a round trip into the 2008 high in 2014, triggering a reversal that printed a higher long-term low at $45.69 during the August 2015 mini flash crash. The stock failed a breakout attempt in the mid-$60s during a test that ended in October 2017, yielding a second higher low, followed by the breakout. The monthly stochastics oscillator has fired on all cylinders during this ascension, reaching the overbought level in tandem with the surge to a 17-year high. (For more, see: How Merck Found Its Way Into Millions of Medicine Cabinets.)

MRK Short-Term Chart (2017 – 2018)

The breakout pierced the .618 Fibonacci retracement (red lines) of the 2000 to 2009 downtrend, setting a new intermediate target at the .786 retracement near $80. The stock turned lower on Wednesday at a rising highs trendline going back to 2015 (green line), possibly signaling the start of a pullback that will test the breakout level. In turn, the blue line at $66 and the 50-day exponential moving average (EMA) rising from $64.50 should be watched for a reversal that could signal a low-risk buying opportunity.

On-balance volume (OBV) has stair-stepped higher since 2014, ignoring sharp peaks and valleys on the price chart. It broke out last week but still hasn't reached the 2008 high, which makes sense because the stock is still trading well below the all-time high. Buying pressure has escalated since May 2018 but looks unsustainable, raising the odds that a pullback will test the resolve of newly minted bulls. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Merck stock has broken out above 10-year resistance and could reach the low $80s in the coming months. A breakout above that level would be significant, setting the stage for a test at the all-time high in the low $90s. (For additional reading, check out: Pharma Favorites: 7 Healthy Picks in the Drug Sector.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>