We last visited with Eli Lilly & Co. (LLY) at the end of May when our Quant Ratings service downgraded the stock. In that update we noted that, "In this Point and Figure chart we can see how prices broke support at $79.57 and are pointed down to a potential target of $71.94... Today's downgrade of LLY adds to the bearish picture and gives us more confidence to execute a bearish strategy."
Over the subsequent three months Action Alerts PLUS holding LLY has made a round trip back up toward its April highs and back down to retest the May nadir. Prices and the underlying indicators have not improved much since May and the overall chart pattern looks more like distribution (selling).
Let's review the latest charts to see if there are opportunities or risks ahead for Eli Lilly.
In this daily chart of LLY, above, we can see that the rally failures have taken more time than the rebounds -- look at the March and April time period when price rolled over and again in June and July. Compare that to the quick rebounds in May and August. Prices have crossed above and below the 50-day moving average line but the line has a bearish slope since mid-August. Prices are above the rising 200-day average but a $2 decline would put LLY back below it.
If you consider volume a key indicator then you will say that the On-Balance-Volume (OBV) line does not give us a strong feeling about an upside move. The OBV line has not shown a strong rising pattern, telling us that buyers of LLY are not being aggressive. The Moving Average Convergence Divergence (MACD) oscillator gave a cover shorts buy signal at the end of August and is poised to cross above the zero line for an outright go long signal.
In this weekly chart, above, we can see that LLY has been stuck in a neutral trading range for a few years. Prices are above the slightly rising 40-week moving average line. The weekly OBV line shows improvement from December but weakness the past two months. The weekly MACD oscillator is in a bearish mode.
In this Point and Figure chart of LLY, above, you should be able to see a $77 to $85 trading range since February. The key takeaway from this consolidation zone is that there is more activity (more Xs and 0s) in the upper half of the pattern. More activity in the upper half tends to mean that this is distribution. A potential downside price target of $76.68 is projected and shown.
Bottom line: LLY could break out over $86 and I would respect the move, but right now I believe the path of least resistance for LLY is lower.