Quest Diagnostics (DGX) Could Enter New Downtrend

Quest Diagnostics Incorporated (DGX) shares surged higher in April after it became the first West Coast lab to offer broad-based COVID-19 testing. Unfortunately for bulls, that market advantage is decaying at a rapid pace, for two reasons. First, many forms of testing have become widely available in the past six months, and second, the company has gotten into hot water with the governors of Arizona and Florida due to legal violations, broken promises, and reporting delays.

Key Takeaways

  • Quest Diagnostics raised fiscal year profit and revenue guidance on Thursday morning.
  • The stock is still trading below a high-volume sell gap, posted in late August.
  • A breakdown at the 200-day moving average could dump the stock more than 15% into the mid-$80s.

Despite growing headwinds, Quest Diagnostics stock is trading higher on Thursday morning after raising fiscal year 2020 earnings per share (EPS) and revenue guidance. However, the uptick hasn't altered the deteriorating technical outlook, at least in the early going, with price action holding well below the Aug. 27 gap. That selloff unfolded when the FDA granted rival Abbott Laboratories (ABT) Emergency Use Authorization for its rapid COVID-19 detection test.

The stock has been testing 200-day exponential moving average (EMA) support since the August decline and needs to fill the gap and lift above $117 to set off fresh buying signals. Conversely, a breakdown here could dump price into the double digits and retrace a high percentage of gains posted since the April low. Short sellers may have an opportunity to profit if that bearish scenario unfolds, with a logical downside target at the .786 Fibonacci rally retracement level in the mid-$80s.

Quest Diagnostics is lightly covered by eight Wall Street analysts, with a consensus "Moderate Buy" rating based upon five "Buy" and three "Hold" recommendations. No analysts are recommending that shareholders sell positions at this time. Price targets currently range from a low of $128 to a Street-high $151, while the stock is now trading more than $16 below the low target, suggesting that ratings may have missed the mark.

Short selling is an investment or trading strategy that speculates on the decline in the price of a stock or other security. It is an advanced strategy that should only be undertaken by experienced traders and investors.

Quest Diagnostics Daily Chart (2016 – 2020)

The stock broke out above the 2006 high in the mid-$60s in 2015, generating a choppy uptrend that topped out near $113 in 2017. A July 2018 breakout attempt failed, yielding a decline that found support at a two-year low in the $70s at year end. The subsequent uptick completed a round trip into resistance in March 2020, giving way to a deep slide to a four-year low, followed by a vertical bounce that reached the prior high in late April.

Price action carved a rectangular pattern off that peak, bordered by the rally high and support at the 200-day EMA just above $100. The stock returned to range resistance and surged higher in July, posting an all-time high at $131.81 on July 23 and turning tail in a decline that failed the breakout in August. Selling pressure then increased, reaching the 200-day EMA and June swing low two weeks ago. 

This morning's upbeat guidance has lifted the stock about four points to $111.50, which is still below the early September high at $112.68. Mounting that barrier would improve the technical outlook, but the unfilled high-volume August gap between $110 and $118 poses a more formidable barrier because buyers are likely to be rebuffed by aggressive selling pressure from shareholders who got trapped in the initial downdraft and are looking to get out.

A public company's guidance is its report to shareholders on the earnings it expects to achieve in the quarter or fiscal year ahead. Alternatively referred to as earnings guidance or a forward-looking statement, the report typically includes revenue estimates, projected earnings, and capital spending estimates.

The Bottom Line

Quest Diagnostics stock needs to hold the Aug. 25 low at $104.10 to avoid a breakdown that could stretch into the mid-$80s, offering a potential short sale opportunity.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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