Dow component Cisco Systems, Inc. (CSCO) reports earnings next week, with Wall Street analysts expecting profits of $0.82 per share on $13.39 billion in fiscal fourth quarter revenue. The stock rallied more than 5% in May after the company met third quarter expectations, but the upside stalled in the following session, leaving the networking giant stuck within a rectangular trading range that has now stretched across five months.
Selling pressure has picked up in the past month, dropping the stock into range support and the 200-day exponential moving average (EMA) while raising the stakes heading into next Wednesday's post-market report. Meanwhile, limp price action has dropped Cisco into the midpoint in Dow Jones Industrial Average component performance after first quarter leadership, well below current market leader Microsoft Corporation (MSFT).
CSCO Long-Term Chart (1990 – 2019)
The stock posted historic gains in the 1990s as a proud member of the "four horsemen" – four big tech stocks that financial advisors recommended as lifetime "buy and hold" candidates to clients. Cisco stock split an incredible eight times during the ascent, which ended abruptly with March 2000's all-time high at $82.00. That month also marked the end of the bull market and opening shot in the collapse of the internet bubble, which shaved more than 90% off Cisco's value in just two and a half years.
A bounce into 2004 stalled near $30, marking resistance ahead of narrow range action that persisted into a July 2007 breakout that failed less than five points above the prior peak in November. A pullback into 2008 accelerated during the economic collapse before bottoming out at a six-year low in the lower teens in March 2009. The stock posted a lower high a year later and sold off once again, testing the prior low successfully in 2011.
That price action completed a multi-year double bottom reversal, setting the stage for a slow-motion uptick that finally mounted the 2007 high in 2017. The rally continued into April 2019's all-time high in the upper $50s and eased into a rectangular pattern that's still in play four months later. Ominously, the reversal has unfolded at the .618 Fibonacci retracement level of the 2000 into 2002 downtrend, which marks a common tuning point.
The monthly stochastics oscillator posted the most extreme overbought reading since 2007 in April 2019 and crossed into a sell cycle that's now picking up steam to the downside, warning that relative weakness could easily persist into the fourth quarter. Taken together with bearish short-term technical elements, the stock could now break range support and head into a test at the 50-month EMA, rising from $40.
CSCO Short-Term Chart (2016 – 2019)
A Fibonacci grid stretched from 2016's two-year low into the 2019 high aligns perfectly with the multi-decade retracements, adding firepower to topping calls while reiterating potential exposure into the low to mid-$40s. However, the grid is just a projection right now because the ending point requires a downside thrust for confirmation. A sell-off after earnings could do the trick because it would also break five-month rectangle support.
The on-balance volume (OBV) accumulation-distribution indicator stalled after hitting a new high in February 2018 (red line) and has been oscillating across that level since March 2019, in lockstep with price action. This convergence raises the odds that both price and volume will set off buy or sell signals at the same time, with buyers winning the battle if OBV and price hit new highs while sellers can declare victory with a breakdown through the current lows.
The Bottom Line
Cisco Systems stock has sold off to key support ahead of next week's earnings and could break down if the networking giant misses estimates.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.