International Business Machines Corp. Stock: Last Puzzle Piece
International Business Machines Corp. (NYSE:IBM) stock has languished as the major indices have gone on to make new all-time highs and its counterparts continue to march higher. My intentions are not to focus on the negatives, but to focus on what IBM has done that is constructive, and on the pieces of the puzzle that I require in order to become fully bullish on IBM stock.
My investment biases are created by analyzing stock charts. I am a firm believer in stock price trends, and in the fact that it takes time for a stock to reach its fair level of valuation. This rationale goes against efficient market hypothesis (EMH), as this theory states that market movements are completely random, and that stocks are always trading at fair value valuations. The good news is that new discoveries in behavioral finance have begun poking holes in EMH, and give my rationale for investment analysis a leg to stand on.
The IBM stock chart has bullish implications, but there is one piece of the puzzle that is missing that would really excite me.
Chart courtesy of StockCharts.com
IBM stock has been drifting lower since early 2013, but the Fibonacci retracement numbers (highlighted in green) argue that the slide has actually been constructive. Fibonacci retracements are a very popular tool used by many technical traders. This tool is used to identify counter-trend price objectives. In theory, when a stock pulls back from a primary trend, shares will retrace approximately 50%-62% of the primary move. This pullback essentially is a normal phenomenon and does little to harm the overall bullish primary trend.
The 50%-62% retracement zone usually offers support as traders will be eyeing this area as one in which to enter long positions, or cover short positions. This zone is referred to by traders as “the box” (highlighted in blue). When shares fall into the box, it signals that traders should cover their short positions and start building a long position.
Using this technique to purchase IBM stock has proved to be a winning strategy. A long position from this strategy would have generated a paper profit of 20%, if I assume an average cost of $128.00.
Such large draw-downs in price might seem like the sky is falling in many cases, but many of the heavyweight stocks that are favored by investors have had similar pullbacks. Such names include Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and the list goes on. Pullbacks are a normal and healthy phenomenon.
The following chart illustrates the obstacle that IBM stock needs to overcome before a bull market can fully resume.
Chart courtesy of StockCharts.com
The downtrend (highlighted in blue) that has developed is difficult to dismiss. This trend line is created by connecting the peaks on a price chart. A downtrend is defined by lower lows, confirmed by lower highs. There should be no mistaking a downtrend, as it can easily be identified as the price moves from the upper left to the lower right of the chart. Downtrends are a clear example of bearish price action.
IBM stock will need to close above this level on a weekly basis in order to confirm that this trend line is in fact broken. Only then can this bull market return to its former glory.
On the above IBM stock chart, you will notice the lower panel labeled “MACD.” 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. The bearish MACD cross came soon after IBM stock tested the downtrend line and failed to break above it. This indicator is signaling that once again the bearish momentum outweighs the bullish momentum and that the bears are once again in control.
If the MACD signal can turn prior to breaking the zero line, perhaps this will produce enough momentum to finally break the downtrend line.
The Bottom Line on IBM Stock
I am neutral on IBM stock, but with a slight bullish bias. I believe that the pullback in the share price has run its course, and I am awaiting a breakout of the downtrend line to swing my bias to be completely bullish.