Dow component International Business Machines Corporation (IBM) ended a 14-month recovery wave in April 2017, dropping more than eight points in a single session after reporting the 20th consecutive quarterly decline in year-over-year revenues. It took a second hit a few weeks later following news that legendary investor Warren Buffett had sold one-third of his $11 million stake, his second 2017 sale.

The stock bottomed out near $150 on May 10 but has failed to gain ground in the past two months, despite a historic tech rally that has lifted many components to all-time highs. IBM stock has also failed to trade back into the broken 200-day exponential moving average (EMA), a major line-in-the-sand between bull and bear markets. This limp action tells observant market players to expect a weak quarter and lower prices when the company reports second quarter results on July 18. (See also: Who Is Driving IBM's Management Team?)

IBM Long-Term Chart (1993 – 2017)

 

This old-school tech behemoth ground sideways for more than 25 years into the 1990s, selling off repeatedly into long-term support near $10.00. IBM stock entered a historic rally at that level in 1993, powered by the embryonic World Wide Web and silicon chip processing breakthroughs. The stock rose nearly 1,400% during this fruitful period, while splitting twice during an ascent into the 1999 high at $138.35.

The stock tested that resistance level repeatedly into the start of 2002 and plunged, breaking four-year support in the mid-$80s before finding support at $54.01 in October 2002. Weak action persisted through the mid-decade bull market, with the stock failing to mount the 2004 high in the mid-$90s until a 2007 rally burst failed at 1999 resistance. IBM relinquished those gains during the 2008 economic collapse, posting a six-year low at support in the $70s in November. (For more, see: Behind IBM's 87.6% Rise in 10 Years.)

A bounce into 2009 gained traction, reaching the prior high at the start of 2010, ahead of a breakout that generated the most prolific returns since the 1990s. That uptick stalled above $200 in 2012, yielding a topping pattern that broke down in 2014, generating a steep decline to a six-year low near $115. The stock bounced through 2016, posted a lower high above $180 in February 2017 and fell more than 30 points into the May 2017 low near $150.

The monthly stochastics oscillator entered a sell cycle three months ago and has now reached the deepest oversold level since 2002. This lopsided reading could inhibit third quarter selling pressure while energizing remaining bulls if the company surprises to the upside. Even so, the monthly pattern continues to advertise even lower prices due to the April rejection at 50-month EMA resistance. (See also: Why IBM Will Go On Forever.)

IBM Short-Term Chart (2013 – 2017)

 

The final wave of the three-year downtrend started at $198 in April 2014, generating an 81-point decline. The bounce into February 2017 stalled at the .786 Fibonacci sell-off retracement, which has a nasty reputation for generating lower highs within topping patterns. An impulsive selling wave ended at $150, followed by a bear flag that filled the May 11 gap. This progressive structure predicts that sellers will return soon and generate even lower lows.

On-balance volume (OBV) peaked in 2012 and stair-stepped lower into 2016, signaling steady institutional abandonment. A bounce into 2017 failed to end the five-year string of lower indicator highs, while the downturn into the third quarter needs little selling pressure to reach the downtrend low.  A breakdown at that level would set off a wave of sell signals, possibly signaling revenue contraction into the next decade as well as a secular decline in stock value. (For more, see: Technology Stocks: Do They All Deserve to Fall?)

The Bottom Line

IBM has failed to find new ways to grow in the current bull market cycle and is underperforming other high-technology components. Long-term technical deterioration has now entered its sixth year and could accelerate when benchmarks finally signal the top of this bull market cycle. (For related reading, check out: IBM's Turnaround Story Hits a Dead End.)

<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>

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