Merck's 0.36% Drop Extends Two-Day 1.04% Slide as Bearish Engulfing Pattern and Key Support Levels Signal Further Decline

Merck (MRK) fell 0.36% on October 3, extending its decline for the second consecutive session, with a cumulative drop of 1.04% over two days. The recent price action reveals a bearish reversal pattern following a sharp 7.39% rally on October 1, suggesting potential exhaustion in the bullish momentum. Key support levels to monitor include the October 2 low at $88.22 and the October 1 low at $85.19, while resistance remains at the October 2 high of $91. The candlestick structure indicates a potential test of these support levels before a possible rebound or further deterioration.

Candlestick Theory

The recent price action forms a bearish engulfing pattern, with the October 3 session’s body engulfing the prior day’s rally. This signals a shift in sentiment, with bears gaining control. Additionally, the price has retested the 50-day moving average (calculated at approximately $89.50) as a dynamic resistance, failing to hold above it. A breakdown below the $88.22 level could trigger a retest of the $85.19 support, which coincides with the 38.2% Fibonacci retracement level of the recent rally.

Moving Average Theory

The 50-day moving average (50DMA) at $89.50 and the 200-day moving average (200DMA) at $88.00 suggest a neutral to bearish bias, as the price has dipped below both. The 100-day moving average (100DMA) at $88.30 is acting as a critical short-term support. A sustained close below the 200DMA would confirm a bearish trend, while a rebound above the 50DMA could indicate a temporary pause in the decline. The convergence of these moving averages near $88.30–$88.50 highlights a key area of interest for traders.

MACD & KDJ Indicators

The MACD histogram has turned negative, with the MACD line crossing below the signal line, reinforcing bearish momentum. The KDJ (stochastic oscillator) shows an oversold condition, with the %K line at 25 and %D at 30, suggesting a potential near-term bounce. However, a divergence between the KDJ and price action—where the %K line fails to rise despite a rebound—could signal further weakness. The RSI, at 35, is approaching oversold territory but remains within a range that does not yet confirm a strong reversal.

Bollinger Bands

Bollinger Bands have narrowed significantly in the past week, indicating low volatility and a potential breakout. The price has recently tested the lower band at $88.10, suggesting a possible continuation of the downward trend. If the bands expand and the price remains within the band width, it would imply a continuation pattern; however, a break below the lower band could signal a new bearish phase.

Volume-Price Relationship

Volume has spiked on the recent decline, particularly on October 1 (33.46M shares) and October 3 (12.97M shares), indicating strong conviction in the bearish move. However, the volume on October 3 is lower than the prior day’s, which may suggest weakening momentum. If the price continues to fall without a corresponding increase in volume, it could indicate a lack of follow-through from sellers, hinting at a potential short-term bottom.

Relative Strength Index (RSI)

The RSI has dipped to 35, nearing oversold conditions but not yet triggering a definitive reversal signal. A close below 30 would strengthen the case for a bounce, but given the broader bearish context, this could also represent a false signal. Traders should watch for a rejection at this level, as a failure to hold above 30 may extend the decline.

Fibonacci Retracement

Key Fibonacci levels from the recent $85.19–$90.75 range include the 38.2% retracement at $89.40 and the 50% level at $89.42. The price’s current position near these levels suggests a potential consolidation phase. A break below the 61.8% retracement at $88.46 would target the $85.19 support, while a rebound above $89.50 could reestablish bullish control.

Backtest Hypothesis

The backtest of an RSI-based strategy (buying at RSI < 30 and selling at RSI > 70) from 2022 to 2025 yielded a 139.45% return, outperforming the benchmark by 92.38%. However, the strategy’s 57.04% volatility and 0.49 Sharpe Ratio underscore its high-risk nature. The recent price action aligns with the strategy’s entry criteria, as the RSI approaches oversold levels. While the confluence of bearish candlestick patterns and moving average breakdowns supports the backtest’s aggressive sell-off logic, the absence of significant drawdowns in the backtest (0.00% max drawdown) raises questions about its robustness in more volatile markets.