Cisco Stock Declines as Guidance Shows Downside Risk

Cisco Systems, Inc. (CSCO) beat earnings per share (EPS) estimates for the ninth consecutive quarter when it reported results after the close on Nov. 13, but shares gapped lower on Nov. 14 on weak guidance. The stock was under negative technicals ahead of earnings, which provided warnings. Cisco shares were under a "death cross" on the daily chart and below semiannual and monthly risky levels at $51.19 and $50.65, respectively.

The world's top networking company is a component of the Dow Jones Industrial Average, and Cisco stock is a member of the Dogs of the Dow for 2019. The stock is cheap with a P/E ratio of 15.49 and dividend yield of 3.10%, according to Macrotrends.

The company has been expanding with slow but steady growth in recent quarters, propelling the stock to its 2019 high of $58.26 on July 16. The stock declined following weak earnings guidance on Aug. 14 and again on Nov. 13. Cisco stock closed Tuesday, Nov. 19, at $45.47, up 4.9% year to date and up 13% since setting its Dec. 24 low of $40.25. Cisco set its 52-week high of $58.26 on July 16 and is now in bear market territory at 22% below the high. 

In the longer term, Cisco stock set its all-time intraday high of $82.00 in March 2000 and set its 21st-century low of $8.12 in October 2002. Back then, I was criticized for picking Cisco as a long-term buy on the Fox Network show "Forbes on Fox." Now we are on the opposite side of the spectrum, with Cisco's semiannual pivot at $50.65 and quarterly risky level at $60.53.

The daily chart for Cisco Systems

The daily chart for Cisco shows a negative "key reversal" day when the stock set its 2019 high of $58.26 on July 16. This sell signal was confirmed after the stock set the new high and then closed that day at $57.62, below the low of $57.87 on July 15. Weakness following this signal resulted in a "death cross" on Sep. 24, when the 50-day simple moving average fell below the 200-day simple moving average. This tracked the stock to its Nov. 18 low of $44.44.

The close of $43.33 on Dec. 31 was a major input to my proprietary analytics, and the annual value level remains at $39.84. The close of $54.73 on June 28 was also an input to my analytics, and a semiannual pivot is now a risky level at $50.65. The close of $49.41 on Sep. 30 was another input to my analytics, and its fourth quarter risky level is $60.53. The close of $47.51 on Oct. 31 was the most recent input, which resulted in a monthly risky level at $51.19.

The weekly chart for Cisco Systems

The weekly chart for Cisco is neutral, with the stock below its five-week modified moving average of $47.07. The stock is well above its 200-week simple moving average, or "reversion to the mean," at $39.23. The stock has been above the "reversion to the mean" since the week of Feb. 12, 2016, when the average was $23.61.

The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week rising to 47.41, up from 25.66 on Nov. 15. Looking back to the week of April 26, this reading was 93.63, above the 90.00 threshold making the stock an "inflating parabolic bubble," which was a warning to reduce holdings on strength.  

Trading strategy: Buy Cisco shares on weakness to the annual value level at $39.84 and reduce holdings on strength to the semiannual pivot at $50.65. 

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Oct. 31 established the monthly level for November.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.