Cisco Earnings Unlikely to Break Trading Range

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Cisco Earnings Unlikely to Break Trading Range

Component of the Dow Cisco Systems, Inc. (CSCO) publishes fiscal second quarter results after the closing bell on Wednesday, with analysts anticipating EPS of 72 cents on sales of $12.4 billion. The stock rose 5% in the session after the November announcement, despite surpassing first-quarter profits and posting in-line sales but failing to break over October resistance. Cisco shares began to fall a few weeks later, laying the groundwork for a violent year-end collapse.

The firm outperformed the broader tech world in 2018, with shares rising more than 13% after posting positive returns in 2016 and 2017. However, Cisco stock spent the most of 2018 trapped in a turbulent trading range, holding steady as trade tensions and increasing interest rates hampered purchasing activity. Despite a robust January rally, price action has yet to break through range barrier, creating the prospect of another negative reversal.

CSCO Long-Term Chart (1990 – 2019)

As a proud member of the four horsemen, a term given to the hottest tech companies of the day, the stock climbed aggressively throughout the 1990s. It split an astonishing eight times between 1992 and 2000, reaching an all-time high in the low $80s only five days after the last stock split in March 2000. When the internet bubble burst, it fell in many waves until bottoming out in October 2002 at a five-year low in the single digits.

In January 2004, a strong bounce stalled in the upper $20s, establishing a resistance level that wasn’t challenged until a July 2007 breakout made limited progress, stalling after gaining less than five points, ahead of an orderly downturn that accelerated into a full-scale rout during the 2008 economic collapse. Throughout the bad market, however, the stock remained considerably above its 2002 bottom, finding support in the mid-teens in March 2009.

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A historic buying opportunity was signaled by a support test in 2011, but it took six years for the ensuing upswing to hit 2007 resistance, ahead of a November 2017 breakthrough that recorded higher highs into October 2018’s 17-year high above $50. In December, the stock hit a six-month low before turning near April support and recovering into January 2019. The stock’s rebound into 2018 came to a halt when it reached the 50% retracement of its nine-year downturn, resulting in a test that is now in its fourth month.

In April 2018, the monthly stochastics oscillator entered a complicated sell cycle and remains in the top part of the indicator panel. This corresponds to the tangled trading range that has been in place since January 2018, with modestly higher prices but horizontal support. There is no indication that this technical setup will favor bulls or bears in the next months, increasing the likelihood that the trading range will continue into the second or third quarter.

CSCO Short-Term Chart (2017 – 2019)

A Fibonacci grid stretched over the uptrend that began in August 2017 emphasizes the significance of the 50% retracement level at $40, with sell-offs in April and December terminating within a few pennies of that level. This is a risky signal for Cisco bulls, with two blue lines signifying the first 100% retracement of a bullish wave since 2016. The positioning of that pattern near the 50% retracement of the previous decade’s decline raises further worries, indicating that price action may be carving a long-term top.

The accumulation-distribution indicator on-balance volume (OBV) hit a seven-year high in January 2018 and then entered an orderly distribution phase, carving lower highs into 2019. The red trendline that runs over the top of those highs is now a critical inflection point, with a break favoring greater price action and a possible breakout to new highs. As a consequence, after this week’s earnings announcement, it’s the spot to check for technical hints.

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The Bottom Line

Cisco Systems stock has been stuck in a trading range for more than a year, and a clear trend, up or down, is unlikely to emerge until later this year.

Disclosure: At the time of publishing, the author had no investments in the aforementioned securities.

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