International Business Machines Corp. (IBM) reports third quarter earnings on Oct. 17, with long-suffering shareholders hoping the company can build on a 2016 recovery wave that posted a 52-week high in July. Price action since that time has raised doubts about future performance, relinquishing a fair share of annual gains while dropping the old school tech giant to a 3-month low.

The stock currently holds the 13th slot in Dow component relative performance and is the weakest of four tech constituents, including newly minted market leader Apple Inc. (AAPL). This neutral positioning suggests adverse reward: risk on both sides of the aisle, with buyers and sellers finding better profit opportunities elsewhere. However, long-term technicals suggest that bulls will prevail in coming months, in the first sustained uptrend since 2013.

IBM Long-Term Chart (1993-2016)

IBM

The stock fell to a 19-year low in single digits in 1993 (post two stock splits) and entered a powerful advance, breaking out above 1987 resistance in 1997. The rally finally ended near 140 in 1999, just ahead of the Dot.com bear market, which yielded a downtrend to a 4-year low at $54.01 in October 2002. Even so, the 60% decline outperformed 90% to 95% tech declines common during that time.

It underperformed during the subsequent bull market, grinding sideways in a dead pattern for more than four years, ahead of a 2007 uptick that stalled within 8-points of the 1999 high in July 2008. It then joined world markets in the economic collapse, selling off to a 6-year low near 70 in November. The subsequent recovery wave unfolded at the same trajectory as the prior decline, returning the price to the 2007 high at the end of 2009. 

A 2010 breakout caught fire, triggering the most prolific price gains since the 1990s. It surged above 200 in 2012, peaking at 210 and dropping into a rectangular top that posted two nominally higher highs into a 2013 downtrend that remains in force, more than three years later. Price action off the rally peak has carved three selling waves and two consolidations into 2010 support (blue line), consistent with an Elliot 5-wave decline pattern that should eventually yield a new uptrend.

IBM Short-term Chart (2014-2016)

IBM

The last selling wave started at the May 2015 high near 176 after the previous rally ended within the October 2014 continuation gap. That gap also predicts the downtrend has ended and is awaiting the start of a new uptrend. Selling pressure gathered strength into February 2016, bouncing at $116.90 and then stalling at the .786 selloff retracement in July. This level also marks the declining 200-week EMA, which has contained all recovery efforts since 2014.

A 100% retracement into 176 will complete a bullish first rise reversal pattern, which marks an early signal for a new uptrend. The failure so far to accomplish this task is waving a red flag, telling market players to stand aside for now. A strong earnings report and broad market strength would assist this effort, while a decline after the news may bring buying signals into question, opening the door to the unfilled Feb. 18 gap between $126 and $130.

On Balance Volume (OBV) is telling a generally bullish tale, completing a 100% retracement into its May 2015 high ahead of price. This positive structure points to significant bottom fishing and value hunting, consistent with a long-term turnaround. However, bottoms take time to form, especially on multiyear patterns, and the process may continue well into 2017 before rewarding shareholders with significant profits.

The Bottom Line

IBM bounced at 5-year support in February 2016, after completing a multi-year Elliott Wave pattern, raising the odds the downtrend has come to an end. However, the stock needs more time to fill out a long-term base, before rewarding long-term positions with substantially higher prices. 

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