Merck (MRK), headquartered in New Jersey, is one of the largest pharmaceutical companies in the world. Its stock has a market cap near $190 billion, explains Richard Suttmeier, growth stock expert and editor of 2-Second Trader

Merck supplies products and services to more than 45 COVID-19 vaccine programs operating around the world. The company is committed to researching and developing treatments to combat the pandemic.

A major portion of their huge drug pipeline is treatments for diabetes, which is a concern given the elevated cases of COVID-19. It's also worth noting that Merck's popular CEO Kenneth Frazier will soon retire.

Current CFO Robert Davis will take his place, which could help drive the stock higher as the new CEO concentrates on boosting Merck's profitability. 

Merck missed on its fourth quarter earnings reported at the beginning of February. Shares declined towards their 200-week simple moving average (SMA), which gives us a good entry point for purchase.

The stock is technically oversold on its weekly chart. And the 200-week SMA is an important support level that should hold. 

As the stock rallies from current levels around $75 per share, I see upside to four different risky levels from our Black Box Tool. Based on Merck's annual risky level at $93.67, we could score a gain of about 25% over the next few months.

Let's take a look at the weekly chart...

merk

The green line is the 200-week simple moving average (SMA), now at $73.46. As you can see from the chart, Merck traded above its 200-week SMA for most of the past three years. 

The stock rallied 75% from its April 2018 low ($52.83) to its December 2019 high ($92.64). As the pandemic unfolded in March 2020, the stock consolidated these gains, declining nearly 30% to its March 2020 low of $65.25. 

Merck held above the green line except for a couple weeks in March 2020. Recent weakness has pushed the stock down near its 200-day SMA for the first time in almost a year. 

I like to buy a stock that trades mostly above its 200-day SMA. This strategy gives us a high probability of catching a rebound to the monthly pivot.

Turning back to the chart, I've included two important horizontal lines. The lower one is the monthly pivot at $78.69. The higher one is the semiannual risky level at $90.73.

In the short-term, I expect Merck to rebound back to its monthly pivot. That would give us a quick 5% gain. 
But I see bigger upside potential from holding Merck long-term...

Why we're buying today

The weekly chart shows that Merck is currently oversold. The red line across the bottom of the chart is the 12-week slow stochastic (SS) reading. It's now at 17.90, below the oversold threshold of 20.

As a reminder, the SS reading scales between 0 and 100. Readings above 80 indicate a stock is overbought, while a reading below 20 means a stock is oversold.

In short, the recent selloff in Merck gives us a great opportunity to buy the stock near a major support level — the 200-day SMA. And based on the levels from our Black Box Tool, we could generate gains of up to 25% over the next few months.

I see upside potentials to Merck's monthly, quarterly, semiannual, and annual risky levels at $78.69, $88.69, $90.73, and $93.67. If Merck rebounds all the way to its annual risky level at $93.67, we'll score a gain of about 25%.

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