CSCO Stock: Bearish Setup
The current U.S. election is one for the history books. The term “political correctness” no longer has any meaning, and the controversies surrounding the favored candidates are overwhelming. For some investors, this is quite alarming and, as a result, these investors are seeking shelter on the sidelines prior to the election.
Cisco Systems, Inc. (NASDAQ:CSCO) stock has been treading water since August, and the lack of follow-through, coupled with hostile market conditions, has increased the chances that this investment will sell off.
My view on Cisco stock is strictly based on the price chart and, as a result, I have reason to believe that bearish headwinds are prevailing. CSCO stock generates a bearish price pattern that could set off some selling that would test lower levels of support.
The following Cisco stock chart illustrates the bearish pattern that I am referring to.
Chart courtesy of StockCharts.com
The chart pattern that has brought me some concern is the head-and-shoulders pattern that is highlighted in the CSCO stock chart above. A head-and-shoulders pattern consists of three troughs and a neckline. Where the middle trough (the head) is the largest, the first and third troughs (the shoulders) are usually of equal size. The neckline is formed by connecting the reaction lows. The pattern is completed when the price closes below the neckline, and a trend reversal is confirmed.
A close below the neckline would target the 200-day moving average as the first level of support. The 200-day moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish; when the share price is below the moving average, it is bearish. It is not uncommon for the price to find support at this moving average.
The 200-day moving average also coincides with another level of support, as illustrated on the Cisco stock chart below.
Chart courtesy of StockCharts.com
There are two levels of support that are highlighted on the Cisco stock chart above.
The first level of support is defined by using a horizontal trend line. This trend line is created by connecting the peaks on the price chart that occurred in 2015 and 2016. This price level served as resistance over that time frame and, in July 2016, this level was finally breached to the upside. When a level of resistance is broken, it becomes a level of support, and it is common for the price to return to test this level from above.
This is the level that coincides with the 200-day moving average, and this would be a difficult level to breach on the first attempt and, as a result, I am expecting a bounce off of this level.
If the market conditions continue to deteriorate, then the second level of support will probably be put to the test. This level of support is defined by using an uptrend line. This trend line is created by connecting the valleys on the CSCO stock chart.
This trend line has been tested numerous times, and each time, buyers came in to support CSCO stock. If this trend line were ever to break, it would signal that a bear market has begun and that lower levels will undoubtedly prevail.
In the chart above, the lower panel labeled “MACD” indicates that the bears are now in control of CSCO stock. The moving average convergence/divergence (MACD) is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals. This indicator turned bearish in October, and it increases the likelihood that support is going to be tested in Cisco stock.
The Bottom Line on Cisco Stock
Economic and political uncertainty is causing bearish headwinds and, at the same time, Cisco stock is setting up a bearish pattern. These factors are reasons to reduce leverage and hedge any risk. A test of support would be within the confines of a bullish trend in CSCO stock and could present an opportunity.