Dow component International Business Machines Corporation (IBM) reports earnings after Tuesday's closing bell, with analysts expecting earnings per share of $4.82 on $21.8 billion in fourth quarter revenue. Shares of Big Blue sold off nearly 8% following October's third quarter results, with bulls jumping ship in reaction to a 2.1% year-over-year revenue decline. That sell-off signaled the next phase in a brutal decline that hit a nine-year low in December.
The stock has rallied nearly 17% in the past four weeks but has now reached three-month resistance created by failed November and December bounces, raising the odds for a sell-the-news reaction that marks the next leg of a basing or breakdown pattern between $100 and $120. A decline into the single digits would set off major sell signals, initiating the next wave in a bear market that started in 2013.
IBM Long-Term Chart (1993 – 2018)
The stock posted a 19-year low in 1993 and turned sharply higher, breaking out above the 1987 high in 1997. It continued to post impressive gains into the third quarter of 1999, topping out at $138 and selling off 50 points into October. A 2000 bounce failed to clear resistance, reinforcing a trading range that broke to the downside in April 2002. Sellers maintained control into October's four-year low in the mid-$50s, which also marks the lowest low in the past 16 years.
A recovery wave into 2008 stalled eight points below the 1999 high, giving way to a downturn that accelerated during the economic collapse. The stock held up relatively well during the crisis, finding support in November after breaking three-year support in the lower $70s, while the subsequent bounce reached the 2008 high in 2010. It hovered at that resistance level for nearly a year and broke out, finally mounting the prior century's high.
The stock exhibited impressive strength into 2013's all-time high at $215.90 and reversed in a minor correction that escalated into a full-scale rout in the fourth quarter of 2014. Selling pressure finally eased at a seven-year low near $117 in February 2016, but the subsequent uptick ran into a brick wall in the $180s a year later, reactivating a downtrend that has now posted the lowest low of the decade.
The 200-month exponential moving average (EMA) ended declines in 2002, 2008 and 2016, but the stock broke that level and failed the 2010 breakout in October 2018. In turn, this establishes long-term resistance in the $130s, making it unlikely that the level will be breached in the next one to three years. The sell-off into December ended at the .786 Fibonacci retracement of the uptrend into 2013, marking final support ahead of a trip back to the 2008 low. The monthly stochastics oscillator confirms this dangerous positioning, failing to cross into a buy cycle during the January bounce.
IBM Short-Term Chart (2017 – 2018)
The on-balance volume (OBV) accumulation-distribution indicator is generating mixed messages, lifting to a four-year high in September 2018 even though the stock was trading more than 30 points lower at the time. Heavy distribution resumed in the fourth quarter but failed to reach the 2016 or 2017 lows, signaling a bullish divergence that could presage a trip into heavy resistance in the $130s.
The bounce that started In December has now mounted the 50-day EMA and reached three-month resistance near $125. A positive earnings surprise could break that level, but a downturn is more likely because the four-week uptick hasn't carved a higher low. The lower red line should be watched closely if that happens because a reversal might complete the right shoulder of an inverse head and shoulders breakout pattern, ahead of a final target at 200-month EMA resistance.
The Bottom Line
IBM stock has bounced off a nine-year low and could reach the $130s in the coming weeks, but so far at least, there is no technical evidence that the stock's long-term downtrend is coming to an end.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.