The Big 3: MRK, GILD, XOM

Marlee Caden (0:02)

Back to Trading 360, I'm Marlee Caden. It's time for the Big Three. We've got three stocks, three charts, and three trades for you. Ben Watson will take us through the charts. Here to take us through the trades today is Dan Deming, Managing Partner at KKM Financial. Great to have you both with us. Dan, we've got nearly green across the screen. The Nasdaq still about a third of a percent lower as we're seeing some heavy weakness in tech. The Neo Cloud's really driving a lot of that. I'd love to get your thoughts on the market action today.

Dan Deming (0:30)

Yeah, this is an interesting day, to say the least. The last couple of days, really, Marlee, with the unwind that's taking place in some of the parts of the tech sector, yet you're still seeing a significant rotation. Breath yesterday, even in the S&P, was strong relative to a 1% down move. And so this rotation, we did see this earlier in the year. It feels like it's starting to unfold a little bit here as we enter the fourth quarter.

As some of the dynamics in the market, as far as valuations, the earning cycle is coming out. And I think also just some of the undervalued sectors in the market are now looking much more attractive at these levels.

Marlee Caden (1:09)

All right. So let's talk about where you are seeing some opportunity right now to make some example trades here. Merck is your first pick and really outperforming the market today. They're up at 2 percent. Earnings coming up at the end of the month here. So what do you like about Merck right now?

Dan Deming (1:26)

Yeah, my health care is the sector that I think that has certainly shown the ability to defy some of this recent selling pressure, a stabilizer moving forward. And it looks poised. To me, it looks poised that it's going to continue to outperform the market moving forward. And I think that's the focus of today with both Merck and Gilead. But yeah, I like Merck here as we're starting to reverse this downtrend that's been in for the last month and a half or so. And today, it looks like we're potentially going to break out of that downward channel. And it'll be interesting to see what Ben has to say. But I think there's a possibility here we could see higher price action now that it has found some stability.

Marlee Caden (2:05)

All right, Ben. So Dan wants to know your thoughts here on Merck. What are you seeing about the potential for an upside move as it's found some stability? And are you seeing stability?

Ben Watson (2:15)

For sure. And Marlee, you look at the one year chart here and you see that Merck has been one of those stronger performance in the health care sector at all. And so you look at maybe a little bit of sideways movement mid-year, but now we've seen the backdrop of a pretty strong run really from the July August earnings timeframe.

Then a little bit of a pullback off of some of these previous highs up around that 157 area or so, that downward channel that Dan described, we're now seeing that little bit of a break. This morning, as investors who are watching some of their concentrated tech positions fall, maybe reaching for some Merck products here on the shelf, as well as in their portfolio, you see that break above that diagonal resistance level. What is going along with that and reinforcing that is this momentum shift. You see that the RSI, that momentum indicator that we use oftentimes has been falling along with price, now breaking out of that diagonal downtrend line. So indicating that maybe there is a bit of a momentum shift, maybe there are some legs here.

And Marlee, in fact, if we look at a three year chart here that I've got lined up in the next chart, it looks even a little more interesting because you have that perspective for maybe a bit of a longer term bull flag bounce taking the price out, just from a measurement perspective, out to around that 170 mark. Of course, that's not a guarantee, that's just what technical analysis might suggest here, Marlee.

Marlee Caden (3:45)

All right, Dan, so Ben is also seeing the potential for momentum to move us higher. So then how would you look about trading Merck for example purposes?

Dan Deming (3:54)

Yeah, I think as it's regaining its footing here, to me the trade example, thought process was to define risk but still offer the ability to capture continuation of this move and up to that region that Ben pointed out. So today's trade example is buying the November 150, 165 call spread. You can buy that for about $5.35.