Dow component Cisco Systems, Inc. (CSCO) fell more than 7% to a 10-month low on Thursday after beating fiscal first quarter profit estimates and posting in-line revenues at $13.16 billion. A 4% decline in orders and a sharp reduction in second quarter guidance triggered a swift sell-the-news reaction, dumping the stock through three-month support in the upper $40s. The stock is set to open Friday's session less than three points above the 2019 low, printed on the first trading day in January.
The company attempted to blame a "challenging macro environment" for quarterly weakness, but analysts didn't buy the excuse, issuing a wave of downgrades that will likely keep pressure on the networking giant for weeks to come. The initial downdraft added to technical damage, confirming new resistance at the 200-day exponential moving average (EMA), which often marks the dividing line between bull and bear markets.
Needham summed up Wall Street concerns, noting down orders in every category and quarterly revenue guidance calling for a 3% to 5% decline, much lower than consensus estimates of a 2% increase. The analyst firm also warned shareholders to expect "a multi-quarter hit" unless there is "meaningful improvement in the economy," raising the specter of a secular downtick that ends Cisco's eight-year uptrend.
CSCO Long-Term Chart (1990 – 2019)
A powerful trend advance through the 1990s generated eight stock splits during an ascent from a few pennies into 2000's all-time high at $82.00. The stock collapsed when the internet bubble broke, giving up more than 80% of its value into the October 2002 low at $8.12. That marked the lowest low in the past 17 years, ahead of a modest bounce that stalled in the upper $20s in 2004. A 2007 rally lifted about five points above the prior peak, giving way to a reversal and failed breakout.
The stock held above the 2002 low during the 2008 economic collapse, finding support in the low teens, and turned higher into the new decade. That uptick made little progress, reversing in the mid-$20s in 2010, ahead of a successful test of the 2009 low in the second half of 2011. The subsequent bounce completed a double bottom reversal generating positive price action that completed a round trip into the 2007 high in April 2017.
A November 2017 breakout attracted steady buying interest into the March 2018 high at $46.16. The rally posted three higher highs into the July 2019 peak at $58.26 and rolled over, breaking down from a small double top and confirming resistance at the .618 Fibonacci retracement of the 2000 to 2002 downtrend. This week's high-percentage decline has initiated the next leg in this developing downtrend, which has the power to end the trend advance that started in 2011.
The monthly stochastics oscillator offers a ray of hope to battered bulls, with a six-month sell cycle crossing into the oversold zone this week. However, this placement often precedes a selling climax, so there's no reason to assume that the decline will end right here. As a result, the 50-month EMA and 2018 range support mark obvious downside targets in the next four to six weeks, exposing a trip into the upper $30s.
CSCO Short-Term Chart (2017 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator ended a long accumulation phase in February 2018, but distribution into 2019 held well above prior low, supporting the final advance into the upper $50s. There has been little selling pressure since the summer months despite the 13-point decline, which is bearish because it tells us that many shareholders have been trapped by the weak quarter and will be looking to exit positions.
Finally, the daily view reinforces the longer-term analysis, with the .618 Fibonacci retracement of the two-year rally narrowly aligning with the $40 level. A sell-off into support will also test the deep December low, adding a bearish psychological twist that could intensify selling pressure in coming weeks. Even so, a new downtrend will take time to unfold, predicting an eventual bounce that gives bulls one final opportunity to wrest control the tape.
The Bottom Line
Cisco Systems stock has broken mid-year support and could enter a secular downtrend in coming years.
Disclosure: the author held no positions in aforementioned securities at the time of publication.