Cisco Systems, Inc. (CSCO) wraps up a productive reporting season this week, with the old school networking giant sitting in a perfect spot to add to impressive 2017 gains. A strong Nasdaq-100 tailwind could add additional points, with the tech-heavy index posting a long string of bull market and all-time highs. Even so, it’s unwise to expect the $171-billion behemoth to move with the vigor of its younger rivals, given average day-to-day price movement of less than 75-cents.
The stock is currently trading at a 16-year high after breaking out above 2-year resistance in the upper-20s. Even so, it’s underperformed the broad tech universe through the last two bull market cycles and still hasn’t reached the .386 Fibonacci retracement of the 2000-2002 Dot-com bear market. This deficiency tells us to lower expectations because the current uptrend is likely to roll over and test much lower levels when the broad market enters a long overdue correction.
CSCO Long-Term Chart (1993–2017)
The stock came public at 4-cents in March 1990, after adjustment for seven stock splits during that fruitful decade. It rallied non-stop between the IPO and March 2000 all-time high at $82, gaining ground as a proud member of the fabled Four Horsemen, a quartet of big tech stocks that financial advisors of the era told clients to buy and hold for life due to their exceptional outlooks.
It plunged when the bubble burst, losing more than 90% into the October 2002 low at $8.12. A bounce into 2004 stalled in the upper 20s, yielding dead price action into a 2007 rally that posted a 6-year high in the mid-30s, ahead of a reversal that sent the stock into a tailspin during the 2008 economic collapse. Selling pressure finally eased in the lower teens in March 2009, while the subsequent recovery wave that confirmed resistance in the upper-20s in 2010.
A decline into 2011 tested support at the bear market low, generating a reversal that finally reached the 2007 high in February 2017. Price action since that time has been constructive, with the stock holding close to multi-year resistance. This establishes a bullish scenario into this week’s earnings, with strong results having the power to trigger a major breakout that targets the mid-40s in the next one to two years.
CSCO Short-Term Chart (2015–2017)
A slow motion recovery wave stalled at $30 in the first quarter of 2015, giving way to a volatile correction that posted lower lows into 2016, when the stock found support in the low-20s. It returned to 2-year resistance in July and broke out but failed to attract momentum buying interest, drifting lower into year’s end. An earnings surprise completed the breakout in February, lifting the stock a few cents above the 2007 high in March.
The 2017 price pattern has drawn a small scale cup and handle pattern that could support a breakout in reaction to better than expected earnings results. However, the handle looks incomplete, requiring a fill of the May 15 gap as a minimum requirement. The red trendline could also come into play if results trigger a sell-the-news reaction, with committed buyers needing to keep the stock above $33 to retain the currently bullish technical outlook.
On Balance Volume (OBV) topped out in 2013 and tested the high in the first quarter of 2015, ahead of an aggressive distribution wave that ended in early 2016. Accumulation mode since that time shows decent buying power but the indicator is still grinding below the 2015 high despite the 2017 breakout, signaling a bearish divergence that points to inadequate institutional sponsorship.
The Bottom Line
Cisco Systems has returned to 10-year resistance and could break out following a strong earnings report this week. However, 2017 price action is closely levered to Nasdaq-100 performance, with a reversal in that market leading instrument having the power to end the rally, dead in its tracks.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>