Why Cisco Stock Will Move Sharply Lower Soon
Bloomberg News
Wall Street's focus on quarterly earnings has trained investors to have a short-term focus, and that means they're watching the few trees around the edges while the forest struggles to survive. The monthly bar chart of Cisco (CSCO) - Get Report below puts the rallies from 2011, 2009 and even 2002 into longer-term perspective.
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The 2002 low completed the first phase of the corrective decline from the 2000 peak, which had followed a parabolic rise in the stock's price. Ralph Elliott, of Elliott Wave fame, taught that parabolic rallies always crash back to the origin of the parabola. Although this price level was achieved at the 2002 low (labeled purple A-circled), the pattern since then is anything but impulsive.
This warns, with a probability of more than 90%, that at least a test of the 2002 low is due before the final corrective action off the 2000 peak ends. The 2007 peak is where the purple B-circled is placed, but the 2015 highs are an equally valid place for the entire bounce off the 2002 lows to be considered mature. Regardless, the next multiyear trend is highly likely to be downward, with either the 2002 lows retested, or those of 1997. Then, conditions will be in place, along with the pattern, to conclude that a new bull market is beginning.
Currently, however, conditions are flashing signs of a peak and reversal. As long as $29.50 remains unbroken, our decision support engine tells us that the time for buying is over, and selling must be considered. If you're long, use $25.50 as your sell stop, before the next shoe drops on Cisco and you wish you'd exited in the $20s. If you're flat, either a retest of $27.50 or a break below $25.50 is ideal to establish short exposure. If you're short, maintain and/or add to your exposure.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.