Eli Lilly and Co. (LLY) reported its first-quarter results here on Thursday morning and beat estimates for earnings and revenue. The fundamental story may appear strong, but weakness in the broad market averages and fading price momentum may dull the price outlook for the drugmaker's stock.
Let's check on the indicators before deciding on a strategy for Lilly.
In this daily bar chart of LLY, below, we can see that prices have rallied the past 12 months. The rising 200-day moving average line was tested several times in January and February, but prices managed to resume their upward trajectory into early April. Trading has been a little more active since early January but not what I would expect for new highs.
The On-Balance-Volume (OBV) line shows a different story than the volume histogram. The OBV line has been stalled in a sideways trend since August and has made a bearish divergence when compared to the rising price action. The 12-day price momentum study in the lower panel of this first chart shows lower highs from March to April even though prices made higher highs. This is a bearish divergence and tells us that the pace of the advance is slowing. This can foreshadow a pullback or correction.
In this weekly Japanese candlestick chart of LLY, below, we can see a top reversal pattern in early April -- a dark cloud cover. The trend may shift sideways from up or it can shift from up to down. LLY is still above the rising 40-week moving average line. The weekly OBV line shows a rise for the past three years, confirming the price gains. The Moving Average Convergence Divergence (MACD) oscillator is narrowing and making a lower high than in August for a bearish divergence.
In this daily Point and Figure chart of LLY, below, we can see that the software has looked at the X's and O's and generated a downside price target of $240.
In this weekly Point and Figure chart of LLY, below, a price target of $240 is also suggested.
Bottom line strategy: In the short run the better-than-expected numbers from Lilly may keep the stock buoyant, but the divergences noted above tell me to at least be cautious or even defensive going forward. In our Feb. 3 review we recommended raising stops to $231 and now we would raise stops to $271.
