Dow component Cisco Systems, Inc. (CSCO) reports earnings after Wednesday's closing bell, with analysts expecting earnings per share (EPS) of $0.71 on fiscal third quarter 2020 revenue of $11.85 billion. The stock reversed at resistance and sold off more than 5% after meeting second quarter guidance in February, ahead of a steeper slide driven by the coronavirus pandemic. That decline ended at an 18-month low in the $30s in March, ahead of a bounce that stalled at the 50-day exponential moving average (EMA) in April.
CEO Charles Robbins noted during the February conference call that "longer-term decision-making cycles" were developing across most product lines due to "global uncertainty." Given the shutdown that followed, it's likely that buying patterns slowed to a crawl by the end of the first quarter. However, a second quarter pick-up makes sense due to improving sentiment and a high-tech customer base that needs to replace and upgrade equipment regardless of the pandemic.
Cisco stock has been an underperformer for two decades, but price action has improved in the past five years, more than doubling into the second quarter of 2019, when the uptick stalled in the mid-$50s. Even so, that resistance level is still more than 20 points below March 2000's all-time high at $82.00. Nearly all big tech stocks, with the exception of Cisco, have mounted the bull market highs posted that year.
CSCO Long-Term Chart (1992 – 2020)
The stock split seven times in the 1990s, with extraordinary buying interest driven by the fall of communism and rise of the internet. The uptrend ended at $82.00 in March 2000, just two sessions after the final split, giving way to a steady downtick that found support at $50 in May. That level broke in November, triggering a steep slide that finally ended in the single digits in the fourth quarter of 2002.
An uptick during the mid-decade bull market topped out below the .382 Fibonacci sell-off retracement level in 2007, yielding renewed selling pressure that held above the 2002 low during the 2008 economic collapse. However, weak buying power into the new decade failed to build a sustained uptrend, generating successful tests at the 2009 low in 2011 and 2012. A positive feedback loop then set into motion, carving a slow-motion advance that reached the 2007 high in March 2017.
A November 2017 breakout caught fire, lifting the stock in two broad rally waves that reached a 19-year high at $58.26 in July 2019. A small double top with resistance at that level broke to the downside in August, signaling a renewed decline that broke through 2018 support near $40 during March's 2020 vertical downdraft. The stock bounced just above new resistance in early April and has spent the past five weeks grinding sideways in a holding pattern.
CSCO Short-Term Outlook
Fortunately for bulls, the monthly stochastic oscillator entered a buy cycle from the oversold zone in February and is now accelerating through the panel's midpoint, indicating that bulls remain in charge of long-term price action, despite the recent setback. In turn, this raises the odds for a buy-the-news reaction after Wednesday's report, potentially remounting broken support at the 2018 low and 50-month EMA.
The perfect placement of the March low in the mid-$30s suggests a long-term bottom as well, reversing right at the November 2017 breakout level. That trading floor also marks the 50% retracement for the entire eight-year uptrend, with the alignment suggesting that the downtrend has come to an end and the stock can eventually continue its long journey back to resistance posted more than 20 years ago.
The Bottom Line
Cisco Systems stock may have ended an eight-month downtrend at the March low, setting the stage for a full recovery back to the bull market high in the $50s.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.