Cisco Systems (CSCO) - Get Report reports quarterly earnings after the closing bell Wed., Aug. 14 and the tech giant should extend its winning streak of beating earnings-per-share estimates to eight consecutive quarters. My call is to buy the stock above its 200-day simple moving average at $51.08 and its semiannual value level at $50.65. I view this as a trading opportunity not adding to a core long position as the weekly chart for Cisco has been negative since the close on Friday, Oct. 2.
Cisco is a component of the Dow Jones Industrial Average and the stock is outperforming the average, which closed Monday up 12.7%. The stock ended at $51.54, up 18.9% year to date and in bull market territory 28% above its Dec. 24 low of $40.25. Cisco set its 52-week high of $58.26 on July 16 and is in correction territory since then, down 11.5%.
Longer term, Cisco set its all-time intraday high of $82.00 in March 2000 and set its 21st Century low of $8.12 in October 2002. Back then I was criticized for picking Cisco as a long-term buy on the Fox Network show "Forbes on Fox." Now we are on the opposite side of the spectrum with monthly and quarterly risky levels at $56.55 and $60.54, respectively.
Cisco closed at $43.33 at the end of 2018 and it had a dividend yield of 3.32%, which qualified the stock to be one of the eight "Dogs of the Dow" for 2019. As the stock rallied and the dividend yield fell below 3% it lost its status to stay in the dog pound in 2020. Today the stock has a P/E ratio of 19.35 and a dividend yield of 2.67%, according to Macrotrends.
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Analysts expect Cisco to report earnings of 82 cents to 84 cents a share when it reports after the close on Wed., Aug. 14. This technology conglomerate makes and sells networking hardware, telecommunications equipment and other "Internet of Things" applications. Its fourth-quarter earnings report will discuss exposures to the China trade war. Wells Fargo is positive on this earnings report on the company's expanding software and subscription revenue. Piper Jaffray re-iterated its overweight rating and price target of $58. UBS says that Cisco is immune to any softening of IT spending.
Keep in mind that Cisco rallied post-earnings in each of the last two earnings; here are five things to focus on to extend this winning streak.
Daily Chart for Cisco Systems
Courtesy of Refinitiv XENITH
Cisco has been above a "golden cross" since Oct. 18, 2017, when the stock closed at $33.55. A "golden cross" occurs when the 50-day simple moving average rises above the 200-day simple moving average and indicates that higher prices lie ahead. The close of $43.33 on Dec. 31 was an important input to my proprietary analytics. The annual value level remains below the market at $39.84. The close of $54.73 on June 28 was another important input to my proprietary analytics and its semiannual value level for the second half of 2019 is $50.65. The third quarter risky level is above the chart at $60.54. The July 31 close of $55.40 was the latest input to my analytics and resulted in the monthly pivot at $56.55, which failed to hold on Aug. 1. The stock is between its 200-day SMA at $51.08 and below its 50-day SMA at $55.75.
Weekly Chart for Cisco Systems
Courtesy of Refinitiv XENITH
The weekly chart for Cisco has been negative since the week of Aug. 2, with the stock below its five-week modified moving average of $54.49. The stock is well above its 200-week simple moving average or "reversion to the mean" at $37.81. The stock has been above the "reversion to the mean" since the week of Feb. 12, 2016 when the average was $23.61. The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 50.46 down from 63.58 on Aug. 9. Looking back to the week of April 26 this reading was 93.63 above the 90.00 threshold making the stock an "inflating parabolic bubble," which was a warning to reduce holdings on strength.
Trading Strategy: Add to positions on weakness to the 200-day simple moving average at $51.08 and to the semiannual value level at $50.65. Reduce holdings on strength to monthly and quarterly risky levels at $56.55 and $60.64, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based on the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based on the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.