Trade of the Day: Merck (MRK)

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Our index indicators are giving bullish readings, an upgrade from last week’s bearish to neutral. But, as has been the case for the past several weeks, it remains to be seen whether those readings will hold up for more than a few days. The underlying 50-day trends remain down, and barring a sustained rally, “lower highs, lower lows” chart patterns may be in the early stages of development. And volatile price movement, whether lower or higher, is not behavior typical of a healthy market. But, until further notice, the indexes are in bullish positions and will remain so by staying above their 50-day moving averages, which for the Dow is currently at 17,580, for the S&P 500, 2,035, and the Nasdaq, 4,670.

Our internal indicators are improving along with the indexes. The 200-day Moving Averages Index remains level 1 bearish, but the Cumulative Volume Index and Advance/Decline Index have returned to level 1 bullish. For reference, level 1 is the strongest reading, level 3 the weakest. Seven of the nine major S&P sector funds are bullish, up from three of nine a week ago. Volatility indexes are spiking lower, but as we mentioned last week, the underlying trend is rising.

Treasury bonds (TLT) are pulling back along with the volatility indexes, a sign that the “fear trade” is abating somewhat. But TLT has a long way to go before falling out of its bullish trend, and until it does, it will continue to draw in money seeking a safe haven. With yet another massive stimulus attempt by a major central bank about to get underway, the amount of money being drawn in might even increase. The U.S. dollar (UUP) is reflecting that possibility by continuing to move higher. Central bankers are indeed creating inflation — but it is showing up in financial markets, not in the real economy. Maybe it’s time to try something different.

The action in the commodities markets continues to be dominated by oil (USO) and gold (GLD). USO is trying to build a base in the $17.50 area, but has a long way to go before being successful. Doing so would be a relief to oil companies and also to many of their employees. GLD continues to rocket higher, but it is hard to believe it is doing so as a reaction to impending inflation. More likely, it is a reaction to the increasing monetary and currency manipulation being undertaken by central bankers around the globe.

With major U.S. stock indexes returning to bullish trends, options traders should move toward a more equal weighting between bullish and bearish positions. However, the underlying trend of rising volatility continues to suggest that you take smaller positions than normal, and monitor those positions closely. Government interference in the markets is ongoing, and that is something markets never like to see.

Today’s recommendation is for a call trade on Merck & Co., Inc. (MRK), a pharmaceutical company whose key products include Januvia (for diabetes), Zetia (for cholesterol) and Gardasil (vaccine for HPV).

Buy the MRK Mar 65 Call options at $0.70 or lower (MRK closed Thursday at $62.59). After entry, take profits if the stock price hits $65.10 or the option price hits $1.70. Exit if the stock price closes below $61.30.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/trade-day-merck-mrk/.

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