Low Expectations Could Fuel IBM Upside

Dow component International Business Machines Corporation (IBM) reports earnings after Wednesday's closing bell, with Wall Street analysts expecting profits of $2.66 per share on $18.29 billion in third quarter revenues. IBM shares rallied to a nine-month high after the old-school tech giant beat second quarter estimates in July but relinquished those gains in August after the company updated guidance following the $34 billion Red Hat acquisition.

The turnaround continues a dreary pattern for long-suffering shareholders, who have watched short-term gains evaporate repeatedly since the stock topped out more than six years ago. Even worse, IBM stock is now trading just three points above the 1999 peak at $138, translating into a 20-year return of nearly zero before dividends. Even so, long-term price action looks constructive, raising hopes for renewed upside in the new decade.

IBM Long-Term Chart (1993 – 2019)

A multi-year downtrend ended at an 18-year low near $10.00 in 1993, giving way to a steady recovery wave that mounted 1987 resistance in the low $40s in 1997. The expanding internet bubble underpinned additional gains into 1999, when the stock topped out in the upper $130s. That peak marked the highest high for the next 11 years, ahead of a trading range that broke support near $90 in the second quarter of 2002.

The decline ended at a four-year low a few months later, giving way to a choppy uptick that stalled less than 10 points under the 1999 high in 2006. Aggressive sellers took control during the 2008 economic collapse, but the stock held mid-decade support near $70, setting the stage for a 2010 breakout above long-term resistance. That rally posted dramatic gains into the 2013's all-time high at $215.90, marking the start of laggard behavior that has continued through the rest of the decade.

Price action since that time has carved an endless series of lower highs that have generated a trendline with resistance currently situated just above $160. The stock tested that level in 2017 and turned sharply lower, undercutting the 2016 low in December 2018. The breakdown yielded a rapid reversal and major bear trap, with the 2019 recovery wave completing a round trip into the October high in July.

A Fibonacci grid stretched across the uptrend into 2013 organizes more recent price action, with the decline into 2016 ending at the .618 retracement while the 2018 downdraft reached within six points of the .786 retracement. The 200-month exponential moving average (EMA) crosses through those sell-offs, highlighting long-term support now centered near $130. This complex pattern reflects a lack of buyers rather than an abundance of selling pressure, indicating that it won't take much enthusiasm to sustain higher prices. 

The monthly stochastics oscillator crossed into a bear cycle from the overbought zone in June 2019 and is now accelerating toward the panel's midpoint, reflecting an increase in selling pressure. Price action has reversed off 50-month EMA resistance for the fourth time since 2017, but 200-month EMA support is growing stronger, raising the odds for another assault on the multi-year trendline in the coming months.

IBM Short-Term Chart (2017 – 2019)

The rally into July 2019 reversed at the .618 Fibonacci retracement of the 2017 into 2018 downtrend after completing a 100% retracement into October 2018 (red line). This could mark the next phase of a bottoming pattern, with a breakout above that level generating the first trip into the long-term trendline in more than two years. It's also instructive to note that the price levels will come into alignment in September 2020. 

The on-balance volume (OBV) accumulation-distribution indicator has lifted to a five-year high despite limp price action, reflecting plenty of bottom fishing and value hunting. Of course, IBM stock is also a Dow component benefiting from index fund buying pressure, especially with the venerable average trading near an all-time high. However, this bullish divergence should be watched closely because it won't take much buying pressure to trigger a trendline breakout.

The Bottom Line

IBM stock has been stuck in the mud for years, but a little good news could trigger a breakout above a major trendline.

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