IBM (IBM - Get Report) is a true turnaround story as the stock is regaining technical momentum and offers a generous dividend. Buy IBM on weakness to its 200-day simple moving average at $133.75 and add to positions on weakness to its semiannual value level at $126.75.
The stock is one of the "Dogs of the Dow" for 2019 and is the cheapest Dow stock with a P/E ratio of 9.89 and a dividend yield of 4.81%, according to Macrotrends.
The stock set its 52-week intraday high of $154.36 on Oct. 3 and fell by a bear market 31% to its Dec. 26 low of $105.94. Then the turnaround story began! Dec. 26 proved to be what technicians call a "key reversal" where the close of $111.39 that day was above the Dec. 24 high of $111.00. A solid earnings report on Jan. 22 resulted in a price gap higher. The stock set its 2019 high of $145.39 on April 16 with the stock up 37% from the low. Earnings were released that day and guidance was light, setting the stage for a 12.7% correction to a May 31 low of $126.85.
Cloud computing and artificial intelligence through IBM's Watson platform is the key to its turnaround story. As a former low-handicap golfer, I will be watching the U.S. Open golf tournament being played at Pebble Beach this weekend. Here's a link to IBM Cognos Analytics, which is predicting the U.S. Open champion.
IBM's cloud computing is on modern mainframes not a farm of servers. In my opinion, this provides a more secure platform. This platform will be enhanced as the company integrates assets from its purchase of Red Hat (RHT) , which has already been cleared by U.S. regulators. The combined entity is said to become the world's largest cloud technology company.
The Daily Chart for IBM
Courtesy of Refinitiv XENITH
The daily chart for IBM shows the fourth quarter 2018 bear market and the turnaround in 2019 that began with the Dec. 26 "key reversal" day. Note that the stock is between its 200-day simple moving average at $133.75 and its 50-day simple moving average at $137.28. Note also how weakness on May 31 held above its semiannual pivot at $126.75. The quarterly value level at $113.09 expires at the end of June so it will not likely come into play. On the bullish side of the coin, its annual risky level is above the chart at $166.09.
The Weekly Chart for IBM
Courtesy of Refinitiv XENITH
The weekly chart for IBM will be positive at the end of this week, given a close above its five-week modified moving average of $134.60. The stock is below its 200-week simple moving average or "reversion to the mean" at $147.86, which is a price target on a positive weekly close. The 12x3x3 weekly slow stochastic reading is projected to end the week unchanged at 27.00. A close above $134.60 will likely cause the stochastic reading to rise, resulting in a positive weekly chart.
Trading Strategy: Buy weakness to the 200-day simple moving average at $133.71 and add to positions on weakness to its semiannual value level at $126.75. Reduce holdings on strength to the 200-week simple moving average at $147.86, then to its annual risky level at $166.09.
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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of January, February, March, April and May. The quarterly level was changed at the end of March. 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."