IBM (IBM - Get Report) reports second-quarter earnings after the closing bell Wed., July 17. My call is to buy the stock between its five-week modified moving average at $139.00 and its "reversion to the mean" at $147.72.
IBM just completed its acquisition of Red Hat, which enhances its cloud computing applications. IBM also offers a generous dividend, which makes it a perennial member of the "Dogs of the Dow." It is becoming a momentum tech stock while maintaining its value-stock credentials. The stock has a P/E ratio of just 10.52 and offers a dividend yield of 4.52, according to Macrotrends.
IBM closed the first half of 2019 at $137.90 on June 28, which became a key input to my proprietary analytics. The only level left over from the first half is its annual risky level at $166.09. The daily chart shows that the stock is above a "golden cross" and the weekly chart has been positive since the week of June 21, when the stock closed at $139.20.
Analysts expect IBM to earn $3.06 to $3.08 per share when it reports after the close on Wednesday, July 17. The company recently completed its $34 billion purchase of Red Hat, which will remain as a separate subsidiary. On July 9, IBM stated that "both companies have already built leading enterprise cloud businesses with consistent strong revenue growth, as they help customers transition their business models to the cloud." IBM has beaten earnings-per-share estimates in the last 18 consecutive quarters.
IBM recently signed a multiyear deal with AT&T worth "billions" for new cloud applications. This makes the company a major player in the roll-out of 5G networks.
Longer term, IBM is consolidating a bear market decline of 50% from its all-time intraday high of $215.90 set during the week of March 15, 2013 to its Dec. 26 low of $105.94. The stock has been strong in 2019 with a gain of 26.3% year to date and in bull market territory up 35.5% since its Dec. 26 low.
The Daily Chart for IBM
Courtesy of Refinitiv XENITH
The daily chart for IBM shows the formation of a "golden cross" on March 27 when the 50-day simple moving average rose above its 200-day simple moving average, indicating that higher prices lie ahead. The 2019 rally began with a "key reversal" day on Dec. 26, when the 52-week low was set at $105.94. The close that day was $111.39, above the Dec. 24 high of $111.00, confirming the reversal. The close of $137.84 on June 28 was an important input into my proprietary analytics. The annual risky level remains at $166.09. The risky level for July is $150.03. Semiannual and quarterly value levels are $129.13 and $124.41, respectively.
The Weekly Chart for IBM
Courtesy of Refinitiv XENITH
The weekly chart for IBM is positive with the stock above its five-week modified moving average of $139.00. The stock is below its 200-week simple moving average or "reversion to the mean" at $147.72 last tested during the week of Oct. 5 when the average was $153.66. The 12x3x3 weekly slow stochastic reading is projected to end this week rising to 69.68 up from 60.07 on July 12. The horizontal lines are the Fibonacci Retracement levels of the 50% decline from the March 2013 high of $215.90 to the Dec. 26 low of $105.94. Note how the 38.2% retracement at $147.97 is just above the 200-week SMA. The higher retracement levels are price targets on strength: The 50% is $160.95 and the 61.8% is $173.94.
Trading Strategy: Add to positions on weakness to the 200-day simple moving average at $132.74 and to its 23.6% Fibonacci Retracement at $131.90. Reduce holdings on strength to its monthly and annual risky levels at $150.03 and $166.09, respectively.
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How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon 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 June 28. 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.