International Business Machines Corporation (IBM) reported quarterly earnings after the closing bell on Oct. 16 and beat earnings per share (EPS) estimates for the 20th consecutive quarter. At issue is that the company's turnaround story lacks revenue growth. The stock is between its semiannual value level at $124.41 and its quarterly pivot at $139.65 with a negative weekly chart.
IBM stock closed last week at $134.09, up 18% year to date and in bull market territory at 26.6% above its Dec. 26 low of $105.94. The stock is also in correction territory at 13.1% below its 2019 high of $154.36 set on Oct. 3. In the longer term, IBM stock is consolidating a bear market decline of 50% from its all-time intraday high of $215.90 set during the week of March 15, 2013, to its Dec. 26 low of $105.94.
IBM stock also offers a generous dividend, which makes the company a perennial member of the "Dogs of the Dow." IBM has a P/E ratio of just 10.35 and offers a dividend yield of 4.83%, according to Macrotrends.
IBM recently completed its acquisition of Red Hat, which enhances the company's cloud computing applications. Earnings were hampered by declining revenue for the fifth consecutive quarter. I would say to be a buyer on weakness, as Red Hat revenue rose by 19% in its last quarter reporting separately. IBM's latest mainframe computer should provide revenue growth into 2020. Keep in mind that IBM recently signed a multi-year deal with AT&T Inc. (T) worth "billions" for new cloud applications. This makes IBM a major player in the roll-out of 5G networks.
The daily chart for IBM
The daily chart for IBM shows the stock had a "key reversal" day on Dec. 26, when shares traded as low as $105.95 and then closed that day at $111.39, above the Dec. 24 high of $111.00. This buy signal was in play as 2019 began.
The close of $113.67 at the end of 2018 was an input to my proprietary analytics, and IBM's annual risky level is above the chart at $166.09. The close of $137.84 on June 28 was also an input into my proprietary analytics. The semiannual value level remains at $124.41. The Sep. 30 close of $145.42 was the latest input to my analytics, resulting in in the fourth quarter pivot of $139.65 and the monthly risky level for October at $145.36.
The weekly chart for IBM
The weekly chart for IBM is negative, with the stock below its five-week modified moving average of $139.92. The stock is below its 200-week simple moving average (SMA), or "reversion to the mean," at $147.69. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 51.67, down from 54.65 on Oct. 11.
The horizontal lines are the Fibonacci retracement levels of the 50% decline from the March 2013 high of $215.90 to the Dec. 26 low of $105.94. Note how the 38.2% retracement at $147.97 lines up with the 200-week SMA. The higher retracement levels are price targets on strength: the 50% is $160.95, and the 61.8% is $173.94. The 23.6% retracement at $131.90 is the key level to hold on weakness.
Trading strategy: Add to positions in IBM shares on weakness to the 23.6% retracement at $131.90 and reduce holdings on strength to the "reversion to the mean" at $147.69.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.