While it has been a see-saw day for the majority of blue chips, Merck & Co., Inc. (MRK: sentiment, chart, options) has enjoyed today. After earning an upgrade, the pharmaceutical firm was boosted nearly 2.5%. Specifically, Bank of America upped its rating on MRK from "neutral" to "buy."
Technically, shares of MRK have slipped nearly 45% during the past 52 weeks, falling 55 percentage points from their mid-December 2007 high. The stock has found support from its 10-week moving average and at the 26 level. However, the security has been unable to breach resistance at the 32 region. Furthermore, the equity's descending 30-week trendline is looming overhead at this stubborn level. MRK has been unable to close above this moving average since January 2008.
Additionally, the stock is seeing resistance from its 10-day moving average. This trendline supported the shares during their rally attempt in December, but after bouncing off resistance at 32, the security was pushed lower, beneath this trendline.
Despite the stock's rather dismal performance, brokerage firms are not extremely bearish. In fact, Zacks reports that MRK harbors 5 "buy" or better ratings, and 8 "hold" suggestions, with not a single "sell" recommendation to be found. This leaves the door wide open for downgrades, if the stock continues to disappoint on the charts.
According to Thomson Financial, MRK's average 12-month price target stands at $32.17, a premium of 17% to Thursday's closing price. The equity could fall victim to price-target reductions in the near future if it is unable to make some serious upward progress.
Additionally, short-term option players are bullishly aligned. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.64 indicates that calls outnumber puts among options slated to expire within the next 3 months. What's more, this ratio ranks lower than 90% of all similar readings taken during the past 52 weeks, meaning that short-term option players have been more bullishly aligned just 10% of the time during the past year.
Further pointing to recent bullish sentiment, options traders on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) bought to open nearly 9 times as many calls as puts during the past 2 weeks. Also, the stock's 10-day call/put ratio of 8.72 is higher than 99% of all other like readings from the past 12 months, pointing to a near peak in optimism among option players.
In conclusion, followers of MRK should be wary. The stock has slipped nearly 10% this year, but investors and brokerage firms remain smitten with the shares. From a contrarian perspective the high amount of optimism, combined with the tumbling price action, has bearish implications.
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