IBM Surges Following Its Earnings Report, and These Are the Implications

IBM Surges Following Its Earnings Report
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IBM Stock: A Stealth Bull Market in the Making

International Business Machines Corp. (NYSE:IBM) reported earnings on October 17 and, although it managed to beat analysts’ estimates on the bottom line, this was still its 22nd consecutive quarter of negative revenue growth. One would think that such a headline would send the price of IBM stock spiraling lower, but that is not exactly how things have gone.

On October 18, International Business Machines stock closed higher by 8.87%, catching many off guard. I know I was, but there is a lesson to be learned in this market environment, and that lesson is: do not “fight the tape” (bet against the trend), especially when the markets are as strong as they currently are, running at a relentlessness pace toward higher levels.

This lesson has led to a surprising move in International Business Machines stock, and this surge in price has done a number on the IBM stock chart. This investment is currently testing a number of very important inflection points. I will outline the implications of these new developments by analyzing the International Business Machines price chart.

Analyzing a company’s stock chart is a method of investment research called technical analysis, and it is my method of choice when investigating a potential investment.

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The following International Business Machines stock chart illustrates the inflection points currently being tested.

Chart courtesy of StockCharts.com

IBM shares are currently testing two distinct and influential price points following the earnings report.

The first influential price point being tested is the 200-day moving average. The 200-day moving average is a trend line that acts as a dividing line that is used to determine whether an investment is in a bullish state or a bearish state.

When a stock price is above the 200-day moving average, it suggests that the investment is in a bullish state, and that a move toward higher stock prices can be expected. When a stock price is below the 200-day moving average, it suggests that the investment is in a bearish state, and that a move toward lower stock prices can be expected.

Following the earnings report, IBM stock gapped right above the 200-day moving average and, in the blink of an eye, this investment went from a bearish state to a bullish one, suggesting that a move toward higher stock prices can now be expected.

This development is the exact opposite reaction that occurred in April, when an earnings announcement failed to enthuse investors and the stock price gapped below the 200-day moving average, correctly implying that lower prices were in development.

The second influential price point is highlighted on the stock chart as a pivot point. Beginning in 2015, and throughout the better part of 2016, IBM shares had experienced resistance whenever they tried to break above the $161.00 price point. This level acted as a ceiling that thwarted all attempts to move beyond it.

This level was finally overcome in December 2016, and a significant move toward higher stock prices ensued. This rally abruptly ended after a disappointing earnings announcement caused the stock price to gap below this price point.

International Business Machines stock is currently testing the $161.00 price point and, in order to confirm the notion that higher stock prices are on the horizon, IBM stock needs close above it.

A break above $161.00 on a sustained basis will also reaffirm the notion that the sell-off experienced earlier this year in IBM stock was in the context of a predominantly bullish trend.

This notion is supported by the indication on the following International Business Machines stock chart.

Chart courtesy of StockCharts.com 

This IBM stock chart has been annotated to include the Fibonacci retracement numbers.

The theory behind Fibonacci retracement numbers is that, when an investment is staging a move toward higher stock prices, it is not uncommon for it to retrace approximately 50% to 62% of the primary move before the trend toward higher stock prices reaffirms itself. This is when weaker hands exit their respective positions and smarter, stronger hands like to enter theirs.

The 50%–62% retracement level has become so popular that traders refer to this retracement as “trading into the box.” This is where respective positions are acquired if you’re long, or they are unwound if you’re short. International Business Machines stock traded into the box this summer and a bottom was formed as it smartly staged a move toward higher stock prices.

This price action assumes that the weakness the stock experienced earlier this year was within the context of a much larger bullish trend.

Analyst Take:

The price action on the International Business Machines stock chart following the earnings report has shined a bullish light on this investment once again. In order to confirm the notion that a bull market is in development, and that higher stock prices are on the horizon, IBM stock needs to break above $161.00 on a sustained basis.