Pfizer Becomes a Falling Knife After Reporting Earnings on Monday

Pfizer Inc. (PFE) was scheduled to report earnings before the opening bell on Tuesday, July 30, but the pharmaceutical giant reported early on Monday, July 29, as it announced that it was merging its Upjohn unit with Mylan N.V. (MYL).

Pfizer, a component of the Dow Jones Industrial Average, beat earnings per share estimates but missed on revenue. As a global drug company, it faced headwinds from currency fluctuations, and sales slipped 10% year over year for its top-selling drug pneumococcal vaccine Prevnar 13. The bottom line is that Pfizer suffered from major drugs that are now offered as generics such as Viagra and Lyrica.

The stock closed Monday at $41.45, down 5% year to date and up just 7.9% from its April 18 low of $38.42. Pfizer is currently trading 7% below its July 1 high of $44.56. The stock is reasonably priced with a P/E ratio of 13.99 with a generous dividend yield of 3.34%, according to Macrotrends. The stock is one of the eight "Dogs of the Dow" for 2019.

The daily chart for Pfizer 

The daily chart for Pfizer shows that the stock has been below its annual risky level at $48.44 all year long. The stock closed at $43.32 on June 28, which was an important input to my proprietary analytics. The stock began this week failing to hold its pivot for July at $42.92. The third quarter risky level is $46.53. On Tuesday, the stock gapped below its second half semiannual pivot at $41.21, which indicates risk to the 2019 low of $38.42 set on April 18. The stock is below its 50-day and 200-day simple moving averages at $42.76 and $42.56, respectively.

The weekly chart for Pfizer

The weekly chart for Pfizer is negative, with the stock below its five-week modified moving average of $42.05. The stock is above its 200-week simple moving average, or "reversion to the mean" at $36.28. The 12 x 3 x 3 weekly slow stochastic reading is projected to fall to 64.47 this week, down from 73.80 on July 26. Back at its fourth quarter high of $46.47, this reading was at 95.51, well above the 90.00 threshold as an "inflating parabolic bubble," which is popping now.

Trading strategy: Buy Pfizer shares on weakness to the 200-week simple moving average at $36.28 and reduce holdings on strength to semiannual, monthly, quarterly, and annual risky levels at $41.21, $42.92, $46.53, and $48.44, respectively.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.