Cisco Systems, Inc.: CSCO Stock Is Setting Up to Spike

CSCO StockCSCO Stock: Locked and Loaded

Cisco Systems, Inc. (NASDAQ:CSCO) stock is setting up to make a serious move, and this comes at time when the volatility in CSCO stock has been nearly erased. Large swings in Cisco’s stock price are almost non-existent. Since the middle of December 2016, Cisco stock has traded in a tight defined range in which only $1.00 has separated the highs and lows.

Contraction of volatility is like a spring being compressed; it is waiting for a tipping point, at which time that spring will be released and all that stored-up energy will be set free. This translates into a spike in volatility, where both the price and the volume surge.

The question that needs to be answered is: will this price spike be in the bullish or bearish direction?

To help shed some light on this question, I will delve into the Cisco stock chart using three different time frames. These time frames can be used to construct a basis that can be used to speculate on the direction that the price will take.

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The following long-term Cisco stock illustrates the bullish development that occurred in 2016.

cscoc

Chart courtesy of StockCharts.com

In the summer of 2016, Cisco stock closed above $28.25, and this price action completed a very large technical pattern known to traders as a “cup and handle” pattern. Traders use these types of setup patterns to identify inflection points in a stock’s trend.

This pattern took a little over eight years to develop, making this a very large technical pattern. The size and scope of a pattern is directly related to the reaction that is anticipated to occur. CSCO stock’s breakout above horizontal resistance should have produced a much bigger reaction than the current $3.00 move.

As long as CSCO stock remains above $28.25, I can only assume that higher prices are set to continue, and this supports the notion that a spike will occur in a bullish direction.

The following medium-term Cisco stock chart illustrates further bullish developments that occurred in 2016.

cscoc1

Chart courtesy of StockCharts.com

In early April 2016, CSCO stock generated a golden cross. A golden cross is a bullish momentum indicator that is produced when the faster 50-day simple moving average (highlighted in blue) crosses above a slower 200-day simple moving average (highlighted in red).

Traders use this signal to suggest that a new bullish trend has begun. A golden cross confirms that bullish momentum has completely overwhelmed any bearish momentum that existed. As a result, it is very common for the price to accelerate higher soon after this signal is generated.

Cisco stock is currently trading above both moving averages, and the likelihood that this signal will avert anytime soon is nearly zero. The positioning of the price and the moving averages serve to suggest that CSCO stock will surge in a bullish upward direction.

The following short-term Cisco stock chart illustrates the price action as volatility has been contracting.

cscoc2

Chart courtesy of StockCharts.com

The price action on the CSCO stock chart above is an example of healthy price action, in which an impulse wave advances CSCO stock and a consolidation wave serves to unwind any overbought conditions and set up the next impulse wave.

This consolidation wave is where volatility has contracted, and this phenomenon is illustrated by the orderly range that has developed.

All eyes are currently on this consolidation wave, and the resolution of the pattern will dictate which direction CSCO stock will spike. A break above the channel and surge in price can be expected, and a break below the channel and a sell-off is expected to ensue.

On average, consolidation patterns break out in the direction of the preceding impulse wave. This suggests that the consolidation pattern will resolve itself in a bullish manner, suggesting that Cisco stock is set to surge higher.

Bottom Line on Cisco Stock

The volatility in CSCO stock has contracted, and this price action will eventually lead to a spike in both price and volume. All three time frames that I have presented above support the notion that the anticipated spike in Cisco stock will likely occur in a bullish upward direction.