CSCO Stock: Testing the Dividing Line
Cisco Systems, Inc. (NASDAQ:CSCO) reported earnings on May 17, causing Cisco stock to drop by 8.5% after it failed to meet revenue projections and announced that it is planning on laying off an additional 1100 employees. Prior to this disappointing earnings announcement, my view on this investment had been bullish, based on the price action and indications that had been generated using the CSCO stock chart.
Yes, that is correct. I base my views on a potential investment by analyzing the indications that occur on the company’s stock chart. This method is not folklore, and I didn’t make it up. This method of investment analysis is known as technical analysis, and it is based on the notion that historical price and volume data can be used to project the future direction of the investment in question.
The sell-off in CSCO stock that has just occurred following the dismal earnings report has done some damage to the bullish picture that was being painted on the price chart. But at this current juncture, the overall picture remains bullish because Cisco stock is currently trading above and testing very key and influential levels of price support.
The following price chart illustrates the important levels of price support that Cisco stock is currently testing.
Chart courtesy of StockCharts.com
In my previous publication on Cisco, “Cisco Stock Price Set to Accelerate If It Clears This Hurdle,” I outlined that the stock price needed to break above $31.50 for the stock price to advance. My analysis was spot on because after Cisco finally managed to close above this hurdle at $31.50, the stock prices proceeded to accelerate to the tune of 9.8% in quick order.
When applying technical analysis, the theory states that once a significant level of resistance is broken, it becomes a new level of price support that should act to support the stock price should it be ever tested in the future. So as a result, it should not come as a coincidence that the sell-off that gripped Cisco stock after the dismal earnings report found support at the exact price point of $31.50.
This metric at $31.50 is also being supported by a very important 200-day moving average. The 200-day moving average is a popular indicator used by many traders because this moving average acts as the dividing line between a stock trading in a bull market and one trading in a bear market. Determining between the two scenarios is actually quite easy.
As long as an investment is trading above its 200-day moving average, it is deemed healthy and therefore within the confines of a bull market, where a higher stock price can be expected to follow. The opposite is also true. When an investment is trading below its 200-day moving average, it is deemed unhealthy, and therefore the investment is trading within the confines of a bear market and a lower stock price can be expected to follow.
The Cisco price chart show an excellent example of how this simple 200-day moving average has been acting as a very important level of price support in the past. In May and December of 2016, CSCO stock tested this moving average from above, and in true bull-market nature, it acted to halt the current price weakness dead in its track and a bullish trend quickly ensued. This bullish trend was being supported by investors who were quick to apply buying pressure and snap up shares as this moving average, which is also known as “the dividing line,” was being tested.
The fact the two metrics are coinciding around one price point only serves to reinforce the significance that this level of price support currently contains. If, in the coming days, CSCO stock can gain its footing and start trending higher, I can only assume that the bull market in this investment is intact and a higher price will likely follow.
If for some unforeseen circumstance, this level of price support fails to support Cisco shares, I will have to believe that lower prices are likely to prevail. This bearish price action would put my bullish view on this investment into question, and I may have to step away from that view.
Bottom Line on Cisco Stock
Cisco stock sold off following a disappointing earnings announcement, and shares have traded lower to test an extremely important level of price support. In order to maintain my bullish view on CSCO stock, the share needs find their footing and stage an advance. At this juncture, caution is warranted.