Exploiting and Embracing Potential Weakness in IBM Stock

IBM StockIBM Stock: An Opportunity is Approaching

My job as an analyst really isn’t that difficult; the work might be daunting at times but, in its most simplified form, it comes down to whether I am bullish or bearish on a potential investment.

I began to watch International Business Machines Corp. (NYSE:IBM) stock late last year because I had reasons to believe that there were bullish tailwinds swirling around this investment. I was sitting on the sidelines waiting for a confirmation signal in order to justify a bullish stance on IBM stock.

For anyone who is not familiar with my work, I use technical analysis to generate my investment views. This style of analysis is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. I have been refining my craft in this method for nearly decades in order to gain proficiency because this approach is so reliant on effectively conveying the message that is being presented on the price chart.

On December 19, 2016, I published a report titled “International Business Machines: IBM Stock Chart Is Finally Bullish,” in which I outlined the factors that were creating the bullish tailwinds and I described the indicator that confirmed that a bullish view was warranted.

The following IBM stock chart illustrates the indicator which confirmed that a bullish view was warranted.

ibm stock chart

Chart courtesy of StockCharts.com 

International Business Machines stock was in a bear market that spanned from 2013 to 2016. This trend toward lower prices contained the quintessential characteristic of a bear market, which included lower highs followed by lower lows. This bearish trend toward lower prices was easily defined by using a simple downtrend line. This downtrend line was created by connecting the peaks on a price chart.

This downtrend line is an extremely useful tool because, as long as IBM stock was trading below the line, I could only assume that the trend toward lower prices was to to continue. In order to confirm that a bull market was beginning, the IBM share price would have to break above this level of resistance. All previous attempts to advance beyond this downtrend line were thwarted, until December 5, 2016, when IBM shares finally broke above this level.

This event is highlighted as a “breakout” on the International Business Machines stock chart above, and it was the confirming indicator that showed that the bear market had ended and a bull market had begun.

The moving average convergence/divergence (MACD) indicator supported this bullish move. MACD is a simple yet effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum.

In November 2016, A bullish cross was generated, indicating that bullish momentum was propelling the stock and that, as a result, the path of least resistance for IBM shares were geared toward higher prices.

At this current time, a bearish cross has just been generated, which serves to suggest that the bearish momentum is now propelling IBM shares and that lower prices can now be expected.

I am now on the lookout for the stock price to test the downtrend line from above.  This type of price action is not uncommon, and traders refer to it as a “backtest.” A backtest would serve to reinforce the notion that the break above the downtrend line was legitimate, and it would establish that the previous level of resistance is now a new level of price support.

The following International Business Machines stock chart illustrates the mounting levels of price support that coincide with the downtrend line.

ibm stock

Chart courtesy of StockCharts.com

The International Business Machines price chart illustrates that there are two distinct levels of price support that coincide with the downtrend line.

The first level of support is defined by using the 200-day moving average. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When a share price is above the moving average, it is bullish; when a share price is below the moving average, it is bearish.

It is not uncommon for this moving average to act as level of price support after a bull market has begun. After IBM stock bottomed in early 2016 and regained this moving average, it has never traded below it.

The second level of support is defined by using a previous level of resistance. In the summer of 2015 and the fall of last year, International Business Machines shares had trouble breaking above the $160.00 mark on a sustained basis. This created a horizontal level of resistance that is highlighted in purple on the chart above. Once this level of resistance was finally broken, it become a new level of price support.

These two levels of price support, with the addition of the downtrend line, suggest that there are currently three levels of price support that coincide with the $160 mark. It is my belief that this level will provide ample support and that, if this level is tested in the near future, it will present an opportunity to set up an applicable trading strategy in which risk can be easily defined.

Bottom Line on International Business Machines

I have been bullish on International Business Machines stock since a bull market was confirmed late last year. At this current juncture I would welcome any price weakness in IBM stock, and use it as an opportunity to initiate an applicable trading strategy.