International Business Machines Corporation (IBM) has been a component of the Dow Jones Industrial Average since June 1979 and has been a perennial member of the "Dogs of the Dow" in recent years. The stock set its all-time intraday high of $215.90 in March 2013 and then traded sideways to down by 50% to its multi-year low of $105.94 on Dec. 26, 2018, as the stock became "too cheap to ignore."
IBM shares closed Tuesday, Jan. 15, 2019, at $121.73, up 7.1% year to date but in bear market territory at 28.9% below the high of $171.13 set on Jan. 18, 2018. The stock is also 14.9% above its Dec. 26 low of $105.94. The shares are cheap with a P/E ratio of 8.52 and a dividend yield of 5.22%, according to Macrotrends.
The company has beaten analysts' earnings per share (EPS) estimates for 16 consecutive quarters, but cautious guidance has hurt the stock's performance. IBM is scheduled to report fourth quarter earnings on Tuesday, Jan. 22, after the closing bell. Analysts expect IBM to post EPS of $4.85 in its fourth quarter. This would be a decline of 6.3% year over year. Revenue is expected to decline 3.5% from a year ago to about $21.75 billion.
The tech giant of old has always produced the best mainframe computers. I personally know this as I used the IBM 360 Main Frame computer for my work at Grumman between 1966 and 1970. During this time horizon, I also used the IBM 360 as I earned my Master of Science Degree in Operations Systems Analysis at Brooklyn Poly, which is now part of NYU.
IBM's state-of-the-art mainframe computers are the backbone for its cloud computing applications, which will eventually take market share from competing cloud computing companies that rely on a farm of smaller server computers that are more vulnerable to hackers. I am cautious on artificial intelligence applications and IBM's Watson platform, which I believe will become more competitive in data analysis, mobile technologies and security.
The daily chart for IBM
The daily chart for IBM shows that the stock formed a "death cross" on May 14, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices would follow. The stock then moved sideways until the 200-day simple moving average failed to hold on Oct. 5, when the average was $150.15. This solidified the "death cross" and led the stock to its Dec. 26 low of $105.94.
Based upon the 2018 close of $113.67, several horizontal lines represent new value levels and risky levels. The lowest horizontal line is my weekly value level at $115.08. IBM is between the next two horizontal lines, which are my monthly pivot at $119.63 and my quarterly risky level at $122.49. Above is my semiannual risky level at $126.75.
The weekly chart for IBM
The weekly chart for IBM is positive, with the stock above its five-week modified moving average of $120.21 and well below its 200-week simple moving average, or "reversion to the mean," at $150.86, last tested during the week of Oct. 5, when the average was $153.66. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 32.36 this week, up from 21.03 on Jan. 11 and rising above the oversold threshold of 20.00. The stock has been tracking the "reversion to the mean" lower since the week of Oct. 17, 2014.
Given these charts and analysis, my trading strategy is to buy IBM shares on weakness to my monthly and weekly value levels of $119.63 and $115.08, respectively, and to reduce holdings on strength to my quarterly and semiannual risky levels at $122.49 and $126.75, respectively.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.