Stocks have traded in a predictable upward channel since the November election. Traders take some profits when prices hit the top guardrail and buyers emerge at the bottom guardrail. Prices bounce around in between the guardrails, ultimately with an upward bias.
The NASDAQ is close to the top rail and is trading with a Relative Strength score of 71.21. A reading above 70 is generally considered an overbought condition and is usually followed by some profit taking, as we wrote about last week.
Now, we have two reasons to expect some red in the near term:
If investors take some money off the board, buy the dippers might consider 13,750 as the first line of support. If that level fails to attract enough blue tickets (buys), then 13,500 is the line that’s held since early November. As long as the NASDAQ floats above the current trend’s low water mark, a serious correction is off the table. The trend is your friend until it’s no longer a trend. The trend is intact.
The bull lives while the NASDAQ stays between the red and green trends lines below.
Once again, technology owns the majority of the positions on our Top 10 leaderboard with seven, eight if we include Amplify Online Retail ETF (IBUY). But, much like the NASDAQ, the tech exchange-traded funds (ETFs) we monitor are poised for haircuts.
A little down the list, Health Care Select Sector SPDR Fund (XLV) triggered a number of technical buy signals. It would not take much buying pressure to push XLV through its 52-week high of $118.99. You know what usually follows new highs… new, higher highs.
We also have a good sense of where to put stops to limit downside. The tightest stop we’d consider is a close below $114 and the loosest stop would be a close below $112.
Merck & Co., Inc. (MRK) is a Health Care Select Sector SPDR Fund (XLV) holding and offers intermediate-term investors a very attractive risk to reward profile, strong fundamentals, and attractive dividend yield.
We are going to focus on the near-term risk to reward aspect.
MRK is close to an oversold reading with a Relative Strength score of 31.05, anything under 30 usually attracts buyers. The pharma company started 2021 on a roll but has fallen from $85 and change to its current level, $75 as we type.
The last time MRK was this low, it rebounded more than $10 in about three months. A return to $85 over the next three-to-six months isn’t out of the question. However, the stock is likely to make some pitstops along the way. The 200-day moving average of $79.39 is the first target.
That’s $4.39 higher than where Merck & Co. is today. On the downside, the stock recently reversed course at $74.23, not much lower than it is now. If we put a stop at $74, that makes for a 4 to 1 reward to risk profile, which is well above the minimum 2 to 1 we use as a rule of thumb.