Old-school tech giant International Business Machines Corporation (IBM) reports second quarter 2020 results after Tuesday's closing bell, with analysts expecting earnings per share (EPS) of $2.09 on $17.72 billion in revenues. The stock sold off more than 5% after beating first quarter 2020 profit estimates in April, with investors walking away after the company withdrew fiscal year 2020 guidance due to the COVID-19 pandemic. It is currently trading just eight points above that session's close, despite high-percentage rallies all across the tech universe.
- International Business Machines Corporation (IBM) stock has been stuck in a major downtrend for seven years.
- Second quarter acquisitions and collaborations could strengthen perennially slow growth.
- The stock needs to trade above $135 or below $115 to alter the technical outlook.
- Long-term readings favor a "buy-the-news" reaction to this week's earnings.
This Dow component has been stuck in a downtrend since posting an all-time high in 2013, carving a long series of lower highs and lower lows. It fell to an 11-year low in the double digits in the first quarter swoon and has, so far at least, failed to remount key levels broken during the downdraft. An impressive number of second quarter acquisitions and collaborations could eventually heighten IBM's perennially weak growth curve, but Wall Street hasn't been impressed by the moves so far, maintaining mixed consensus ratings.
Understanding Buy, Sell, and Hold Ratings:
Analysts research public financial statements, listen in on conference calls, and talk to managers and the customers of a company. Ultimately, through all this investigation into the company's performance, the analyst decides whether the stock is a "buy," "sell," or "hold."
IBM Long-Term Chart (1999 – 2020)
A multi-year uptrend topped out at $138.35 in 1999, marking a high that wasn't challenged for the next 11 years, ahead of a selloff into the mid-$50s. A mid-decade uptick stalled about eight points under that level in 2008, giving way to a vertical decline during the economic collapse. IBM stock bottomed out at a six-year low near $70, offering a low-risk buying opportunity that benefited from a strong rally impulse into decade-long resistance in the fourth quarter of 2010.
An immediate breakout slowed above $210 in April 2012, yielding an all-time high at $215.82 one year later. The subsequent pullback completed a double top breakdown in 2014, initiating a downtrend that remains in force as we head through the third quarter of 2020. The stock has been cut in half during this period, despite massive buybacks that were supposed to underpin price. It continues to offer a hefty dividend yield that currently pays 5.24%.
The multiyear decline has carved a nearly perfect seven-year descending trendline that now places resistance around the $155 level. Higher lows over 18 years have also carved a rising trendline that places support near $100. These two lines won't intersect until 2025, but it's likely that the stock will exit the pattern, higher or lower, in the next one to three years. Right now, the odds heavily favor a breakdown into the double digits.
IBM Short-Term Chart (2018 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator entered an accumulation phase in the fourth quarter of 2018, lifting to an eight-year high in February 2020. That positioning was technically perfect for a trendline breakout, but the market had other plans, dumping the stock into March. Accumulation has now settled down to levels first reached in July 2019, highlighting renewed apathy despite big tech's second quarter assault to higher ground.
Short-term price action has eased into a neutral zone at the .50 selloff retracement and intersection between the 50- and 200-day exponential moving averages (EMAs). The stock needs to clear the $115 to $135 price zone, higher or lower, to set off longer-term directional signals with this positioning, telling observant market players to curb their enthusiasm if there's a "buy-the-news" reaction to this week's confessional. That uptick seems likely at this time because long-term relative strength readings now favor higher prices.
What Is a News Trader?
A news trader is a trader or investor who makes decisions based on news announcements. Breaking news, economic reports, and other reported events can have a short-lived effect on the price action of stocks, bonds, and other securities. News traders try to profit by taking advantage of market sentiment leading up to the release of important news and/or trading the market's response to the news after-the-fact.
The Bottom Line
International Business Machines stock could gain ground after this week's earnings report, but a sustained trend is unlikely until 2021, at the earliest.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.