2 Dow Stocks Flashing 'Buy' Signals – Schaeffers Research (blog)

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Athletic apparel stock Nike Inc (NYSE:NKE) is off its 2017 highs, after a stellar post-election rally. However, if past is prologue, NKE stock could be pointing to a buying opportunity right now. In addition, fellow Dow stock and pharmaceutical giant Merck & Co., Inc. (NYSE:MRK) recently bounced off familiar support, and is sending up “buy” signals of its own.

NKE Stock Tests Multi-Layered Support

The shares of NKE have pulled back since peaking at $59 in mid-to-late March — about a point from their late-August annual high. However, the shares are currently testing multiple layers of support in the $54 neighborhood. To start, this area represents a 50% Fibonacci retracement of NKE’s rally from early November to its March peak, and previously acted as a roadblock for the blue chip in early 2017. Second, the stock is testing its 200-day moving average. After its last five tests of this trendline, NKE went on to average a one-month gain of nearly 4%, and was higher 75% of the time according to data from Schaeffer’s Senior Quantitative Analyst Rocky White. Furthermore, NKE stock recently breached its lower Bollinger Band — one of the best “buy” signals of the past year — for only the second time since early November, suggesting the stock was oversold. 

Nike NKE stock chart

Nike Skepticism Abounds

Should NKE once again muscle higher, there’s plenty of pessimism left to unwind to fuel future gains. Short interest represents more than a week’s worth of pent-up buying demand, at NKE’s average pace of trading. Meanwhile, the stock has racked up a 10-day put/call volume ratio of 1.13 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) — in the 81st percentile of its annual range. In other words, NKE options buyers have initiated bearish bets over bullish at a faster-than-usual clip during the past two weeks.

For traders looking to roll the dice on a Nike rebound, it’s a great time to buy short-term options on the stock. The equity’s Schaeffer’s Volatility Index (SVI) of 16% is just 2 percentage points from an annual low, suggesting historically low volatility expectations are being priced in right now.

Merck Stock Pullbacks Present Buying Opportunities

Merck stock is also off its March highs — a 15-year peak — but recently bounced off its own area of multi-layered support. Specifically, the $62 region represents a 23.6% Fibonacci retracement of the security’s rally from its August 2015 lows to the aforementioned peak. This neighborhood is also home to MRK’s ascending 200-day moving average. According to White, MRK was higher 100% of the time one month after its last three tests of this trendline, averaging an impressive gain of 4.6%.

Merck MRK stock chart

MRK Options Attractively Priced

As with NKE, MRK option buyers have been much more bearish than usual during the past two weeks. The stock’s 10-day put/call volume ratio on the ISE, CBOE, and PHLX sits at 2.01 — higher than 94% of all other readings from the past 12 months. A mass exodus of option bears could propel MRK even higher. Plus, those looking to buy short-term Merck & Co., Inc. (NYSE:MRK) options can do so at a discount, with the stock’s SVI of 22% in just the 28th percentile of its annual range.

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