Dow component International Business Machines Corporation (IBM) dropped like a rock in October after reporting a 3.9% year-over-year revenue decline, but long-suffering shareholders have relatively high expectations heading into next week's fourth quarter report. The company completed the $34 billion Red Hat acquisition in July 2019, and cloud computing results should now include that segment, which has greatly expanded IBM's Asian Pacific footprint.
A legacy hardware business and high debt levels have undermined IBM results in the past decade, overcoming major initiatives in artificial intelligence, cloud computing, analytics, and cognitive technologies. Rapid growth in these newer divisions could finally staunch the bleeding and generate a much-needed revenue surge, allowing the old-school tech giant to compete more forcefully with Microsoft Corporation (MSFT) and other rivals.
IBM Long-Term Chart (1993 – 2020)
A multi-year decline ended near a 19-year low in 1993, yielding a steady uptrend that posted new highs in the upper $40s in 1997. The internet bubble then kicked into gear, substantially adding to gains into the 1999 top at $138. That marked the highest high for the next 10 years, ahead of a volatile trading range that persisted into a 2002 breakdown. Selling pressure finally ended a few months later at a five-year low in the mid-$50s, marking the lowest low in the past 17 years.
A slow-motion uptick stalled at new resistance above $100 in 2004, reinforcing a ceiling that finally broke in the second quarter of 2007. The subsequent advance continued into July 2008 before reversing less than 10 points under the 1999 high and giving way to a vertical decline during the economic collapse. That impulse found support well above the 2002 low, printing a higher low that set the stage for a strong recovery into the new decade.
A 2010 breakout above the 1999 high attracted strong buying interest, posting the strongest upside of the new century into 2013's all-time high at $215.90. The subsequent decline accelerated one year later, establishing a major downtrend that remains in force as we enter the new decade. Multi-year lows in 2016 and 2018 generated waves of bottoming calls, but the stock hasn't posted a higher high in nearly seven years.
Those lows marked successful tests of the 2010 breakout, with that level now perfectly aligned with the 200-month exponential moving average (EMA). The stock hovered at this support level throughout 2019, bounded by the falling 50-month EMA. In turn, this has generated a long-term "rock and a hard place" set-up in which price action will eventually break through one of the moving averages and enter a sustained trend higher or lower.
IBM Short-Term Outlook
The monthly stochastics oscillator entered a sell cycle from the overbought level in June 2019 and has nearly reached the oversold level. This is a modestly negative pattern, indicating that bears remain in charge as we head onto next week's earnings. A sell-the-news reaction could be destructive with this price structure, raising the odds for a breakdown through the 200-month EMA and a retest of the deep 2018 low.
Sadly, a rally into the 50-month EMA in the mid-$140s won't improve the bearish technical outlook because the stock has failed six attempts to mount this barrier since 2015. So, just to be safe, remaining IBM bulls may want to hold off on taking long-side exposure until an uptick finally mounts the black trendline of lower highs in the mid-$150s. That event would signal a major change in sentiment, setting the stage for a multi-year recovery.
The Bottom Line
Bulls hope the Red Hat acquisition will finally end IBM's multi-year decline, but the long-term chart confirms that most market players remain skeptical about the company's outlook.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.