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MedcoHealth Sol. - MHS - close: 50.00 change: -2.20 stop: 52.21

Company Description:
Medco Health Solutions is a leader in managing prescription drug programs that are designed to drive down the cost of pharmacy healthcare for private and public employers, health plans, labor unions and government agencies of all sizes. Medco operates the largest mail order and Internet pharmacies and has been recognized for setting new industry benchmarks for pharmacy dispensing quality. (source: company press release)

Why We Like It:
We're adding MHS to the play list as a bearish candidate based on its technical breakdown but the story fueling the move sounds like bad news too. This morning the Wall Street Journal printed a story that MHS has decided not to comply with a subpoena for documents by the U.S. Health & Human Services (HHS) agency. MHS wants the HHS to promise not to share any documents with other government agencies. MHS and a number of other pharmacy benefit managers are already undergoing a government probe looking into potential fraud and kickback schemes. We like the high-volume breakdown under technical support at the 50-dma after two months of consolidating in a wedge-like pattern. Today's decline looks like a new bearish entry point but the selling stopped at the $50.00 mark, which tends to act as psychological support or resistance. We are suggesting that readers use a trigger at $49.90 to confirm the breakdown and target a drop into the $45.50-45.00 range. There is a potential challenge near $47.50 where the simple 100-dma lies but we suspect that with the broader market looking like it wants to consolidate lower that shares of MHS could bypass this next level of technical support.

Suggested Options:
We are suggesting the July puts.

BUY PUT JUL 55.00 MHS-SK OI= 183 current ask $5.50
BUY PUT JUL 50.00 MHS-SJ OI=2298 current ask $2.15
BUY PUT JUL 45.00 MHS-SI OI=1477 current ask $0.60

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.0 million
 

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