IBM Is Breaking Down

International Business Machines (IBM - commentary - Trade Now) is losing ground again today after a very damaging 3% drop on Thursday. Last week's drop undercut the June lows and pushed the stock well below its 50-day moving average for the first time since early March. Overall volume was very light during last week's holiday shortened trading, but in the case of IBM, the downside action attracted a big surge in trade, which continued an ugly 16-day stretch for the stock that included only three positive days since June 12.

IBM Daily (NYSE) International Business Machines TradeStation

Volume initially began to contract back in late April, shortly after IBM powered through its declining 200-day moving average. The stock moved higher while maintaining a tight consolidation pattern during this time frame as momentum eased dramatically. As IBM reached its highs for the year, upside volume was stuck in the mud, producing well below average levels from May 1 through today. As a result, an important topping pattern was taking shape. The breakdown during the last two sessions confirms the top and will likely lead to lower prices before this move is over.

IBM Weekly (NYSE) International Business Machines TradeStation

IBM is now very close to support near its May lows, but I doubt this level, just below $100.00, will hold. I expect the stock to test its early February highs of $97.00 within the next week or so. The huge rally off the November highs underwent its first significant selling pressure after hitting $97.10 on February 6. This area should offer significant support and would be a low-risk area to buy, provided volume continues to fade during the drop. IBM's 200-day is just below, near $95.00, and will also offer strong support. A test of this moving average would equate to a one-third retracement of the powerful rally off the November lows.

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Know what you own: Other PC-related stocks include Apple (AAPL - commentary - Trade Now), Microsoft (MSFT - commentary - Trade Now), Hewlett-Packard (HPQ - commentary - Trade Now), Dell (DELL - commentary - Trade Now), Sun Microsystems (JAVA - commentary - Trade Now) and International Game Technology (IGT - commentary - Trade Now).

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At the time of publication, Morrow had no positions in the stocks mentioned.