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Profit from Earnings Volatility With This Biotech Stocks Pairs Trade

Chris Tyler

If the trend is your friend, off and on the price chart biotech stocks Merck (NYSE:MRK) and AbbVie (NYSE:ABBV) make a great pairing as a sector long and short in MRK stock and ABBV stock. Let me explain.

Earnings and its associated volatility can be a tough trade. I’ve said that before and I’m sure I’ll say it again. There are however, times when an earnings confessional and price action go hand-in-hand for good reason. That appears to be the case for biotech stock Merck.

Then there are times when other worries simply trump whatever a company has to say at the corporate altar. And that’s the situation facing ABBV stock in today’s market and why it’s time to position for a pair of friendly bullish and bearish trends still in motion off and on the price chart.

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Biotech Stocks Long: MRK Stock

An existing bullish trend in MRK stock just became a good deal friendlier following Tuesday’s all-around strong earnings report. By the numbers, the first of our two biotech stocks delivered stronger-than-forecast profits of $1.22 versus the Street’s estimate of $1.05.

A supportive sales beat on revenues of $10.81 billion was also announced. Strong sales of $2.27 billion in Merck’s core Keytruda drug and year-over-year growth of 55% led the way.

And that’s not all this biotech stock did to please investors either. Merck also backed up the solid quarter by narrowing and raising its full-year profit and sales guidance slightly above the midpoint of consensus estimates.

Lastly and rounding out the corporate confessional and making conditions more bullish on the price chart, Tuesday’s investor reaction of 2.51% did double duty on the monthly time frame.

MRK Stock Monthly Chart


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On the monthly price chart, Tuesday’s decent reaction by investors is a much bigger deal longer-term. With the gain MRK stock effectively managed to establish an engulfing candlestick resembling a hammer pattern for the month of April. That’s potentially very bullish. And with this biotech stock’s uptrend intact following a pair of healthy corrective bases over the past couple years, our recommendation is to put Merck shares on the radar for purchase.

Specifically, I’m in favor of giving away some potential upside in MRK stock in order to receive additional price confirmation. That said, I’d recommend waiting to buy this biotech stock above the pattern high of $83.85 on the expectation of bullish momentum and profits to follow.


Biotech Stocks Short: ABBV Stock

The second of our two biotech stocks is AbbVie. And much to the chagrin of ABBV stock bulls, shares are setting up the short side of this pairs trade.

Bottom line, despite a terrific sounding earnings report last week, ongoing and escalating concerns about generic competition for its once untouchable Humira drug continues to make investors more than a bit itchy to exit.

On the price chart shares of ABBV stock have corrected by roughly 37% since hitting an all-time-high last January. Typically and for a company of AbbVie’s size, that would be enough to consider looking at shares as an opportunistic value play. But not this time.

With so much of this biotech’s success attributed to Humira and those sales now at risk, uncertainty manifesting itself over the past four few months into a tight series of doji candles near key technical lows is concerning. It’s also potentially a profitable short position.

ABBV Stock Monthly Chart


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My recommendation is to short ABBV stock below $76.81. This entry only triggers if April’s doji, which failed at angular resistance, is penetrated on the downside.

After three plus months of narrowing and anxious price action, a short position should turn quickly profitable with shares increasingly at risk of trending towards longer-term support in-between $60 — $62.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.

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