IBM Stock Could Offer Profitable Short Sales

Dow component International Business Machines Corporation (IBM) posted a horrific negative 26% return in 2018 but has gained nearly 19% so far in 2019. Unfortunately, that has fostered complacency among newly minted shareholders who don't realize that the multi-year downtrend remains in full force. Even worse, the bounce since December has lifted into a price level that could offer outstanding gains for aggressive short sales.

So far at least, the bounce in IBM shares has failed to end the unbroken string of lower highs and lower lows in place since the March 2013 top. In addition, the stock has just reversed at 50-week exponential moving average (EMA) resistance, after failing to reach 200-week EMA resistance, exposing structural weakness. Meanwhile, long-term relative strength readings continue a buy cycle that began in January 2019, delaying a downturn that could test the 2018 low.

IBM Monthly Chart (1987 – 2019)

Monthly technical chart showing the share price performance of International Business Machines Corporation (IBM)

A multi-year rally topped out at a split-adjusted $43.69 in 1987, giving way to a persistent downtrend that finally bottomed out near $10 in 1994. It took four years for the subsequent bounce to reach the prior decade's high, generating an immediate breakout that developed strong momentum into the 1999 high at $138.35. That marked the highest high for the next 11 years, ahead of a broad topping pattern that broke to the downside in 2002.

Selling pressure ended in the mid-$50s a few months later, yielding weak upside into 2007, when a healthy uptick surged toward the 1999 high. The stock stalled nine points under that resistance level in 2008 and got pummeled during the economic collapse, giving up more than two years of gains in less than four months before finding support in the $60s. The November low marked a historic buying opportunity, ahead of a rapid recovery that reached the 2008 high in December 2009.

A 2010 breakout generated widespread interest, lifting the stock nearly 80 points into the 2013 all-time high at $205.90. It broke down from a triple top pattern six months later, entering a brutal downtrend that gathered momentum into 2016's six-year low at $116.90. It bounced to $180 a year later and turned tail once again, carving the second lower high since the 2013 peak. The subsequent decline held support near $140 through most of 2018, finally breaking down in October, ahead of December's nine-year low.

The sell-off into 2016 found support at the .618 Fibonacci retracement level of the four-year uptrend, which had narrowly aligned with the 200-month EMA. It pierced that level and the moving average in late 2018 before remounting both obstacles into March 2019. However, it has now dropped through the moving average once again, reinforcing new resistance while opening the door to continued downside that could easily reach the .786 retracement level at $100.

IBM Failed Long-Term Breakout

Three-year price action looks like a failed breakout above the 1999 high (green line), which has narrowly aligned with the 200-month EMA. The bounce into March has reversed at this new barrier, telling market players that the multi-year downtrend could resume at any time and drop the stock to new lows. Even so, the monthly buy cycle isn't fully cooperating yet, raising the odds that upside will continue into the red or blue line.

A Fibonacci grid stretched across the downtrend shows that the current advance still hasn't reached the .382 retracement, exposing hidden weakness. The next rally burst could lift the stock into the red trendline of lower highs, the October breakdown and the closely aligned .382 retracement level, offering a potential short sale. However, a bearish stochastics crossover should generate the most reliable entry signal in the coming weeks, regardless of the underlying price level.

The Bottom Line

IBM stock is approaching major resistance after a strong bounce off multi-year lows and could generate profitable short sales for positions held into the third quarter of 2019.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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