IBM Stock: Anticipated Weakness
International Business Machines Corp. (NYSE:IBM) stock is trading lower by 4.44% after reporting earnings that failed to enthuse investors. It reported lower-than-expected margins and, given this was its 20th consecutive quarter of negative revenue growth, there was very little encouraging news that investors could play off of.
I am actually not even the slightest bit surprised that IBM stock is down, because I have been looking for price weakness to play out in International Business Machines stock.
On March 29, 2017, my report, “Exploiting and Embracing Potential Weakness in IBM Stock,” was published. I outlined that there were indications which suggested that lower IBM share prices were likely set to prevail but, because this expected price weakness was in the context of a larger bullish trend, this price weakness could be embraced if it presented itself.
To clarify for anyone who hasn’t has the pleasure of reading any of my previous publications, I generate my investment views using technical analysis. This method of investment analysis is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. It was this method that derived my view that lower IBM shares prices were a possibility.
Price weakness has now presented itself and, in order for the premise outlined in my previous publication to stand true, it is very important that International Business Machines stock finds a bottom at the current level.
The following stock chart illustrates the indication which suggested that lower prices were a likely endeavor.
Chart courtesy of StockCharts.com
In December 2016, the landscape surrounding IBM stock became bullish after the share price broke above a downtrend line.
This downtrend line contained the price of IBM shares from 2013 onward, and it served to define a bear market that drove shares from a high of $192.17 to a low of $112.78. This trend line that is created by connecting the peaks on the price chart captures the quintessential characteristic of a bear market, which is a trend that contains lower highs and lower lows.
Breaking above this downtrend line indicated that the bearish trend that pressured IBM shares had finally concluded, and it opened the door for a bullish advance to begin. Shares did stage a quick advance, but the moving average convergence/divergence (MACD) indicator located in the lower panel of the above chart suggested that price weakness could be expected.
MACD is a simple, yet effective, trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum. In March, a bearish cross was generated, indicating that bearish momentum was propelling the stock and, as a result, IBM shares were geared toward lower prices.
Based on the bearish MACD indicator, I was on the lookout for the stock price to test the downtrend line from above. This is referred to as a “backtest,” and this type of price action is not uncommon. A successful backtest would serve to reinforce the notion that the break above the downtrend line was legitimate, and it would establish the downtrend line as new area of price support.
The sell-off following the earnings announcement has placed IBM stock directly on the downtrend line. This is exactly the price weakness I was anticipating. Note that the exact low on the candle stick pattern corresponds with the downtrend line.
The following International Business Machines stock chart illustrates the levels of support that currently coincide with this downtrend line.
Chart courtesy of StockCharts.com
International Business Machines stock is currently sitting on two distinct levels of price support that just happen to 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 and 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 common for the moving average to act as a level of support during bull market advances.
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 became 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 $160.00 mark. In my previous publication I stated, “It is my belief that this level will provide ample support, if this level is tested in the near future.” That future is now and, in order to maintain its bullish posture that began in December of last year, the price must hold this level.
Bottom Line on IBM Stock
At this current juncture, IBM stock is down but not out. Testing an important level of support is the equivalent of a standing eight count in a boxing match and, in order to remain bullish on International Business Machines stock, it is critical that shares hold this level of price support.