Some investors may not remember the good old days of Cisco (CSCO) - Get Report when it was a darling of traders, retail investors and the media. Those days largely ended after the technology peak of 2000, when the company's stock price reached $70. By 2002, the stock had fallen to a low of $7, meaning it had lost 90% of its value.
It has taken a long time, and a lot of work by the company, but the crowd has begun to renew its love affair with Cisco. Unfortunately, as we are about to show, this is exactly the wrong time to fall in love with this stock.
Above is the monthly bar chart of Cisco going back to the all-time high. Our proprietary decision support engine (DSE) has identified the pattern off that extreme high as a massive correction in progress that was not complete as of the 2002 crash low.
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The DSE's hunter/seeker, pattern recognition algorithms filter all chart patterns and sort them into "if/then" or "cause/effect" genres, which are then probability ranked across all historic data. The pattern that Cisco has created in the past 16 years is that of a weak intervening bounce within an ongoing down/up/down pattern. It's classified as weak because the stock is only now, after 14 years of struggle, reaching up to the 38% Fibonacci resistance level, which is the minimum expectation after the initial crashing phase. Therefore, while the media have recently latched onto the fact that these are the highest prices since 2001, the character of the rise is but a faint echo of the power that the stock was manifesting into the all-time high.
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Besides that Fibonacci measure of weakness, the lower pane in the graph shows the stochastics reaching overbought extremes last seen at the 2013, 2010, 2007, and 2004 swing highs, all of which resulted in multimonth declines. This suggests that at the very least, investors who have a long position in this stock should use the $30 level as a protective sell stop to avoid the risk of a correction into the low $20s at least. Above the 90% extreme overbought threshold (pink zone) of the stochastics is the time when selling actions are indicated. Added to the weakness of only reaching the Fibonacci 38% resistance level, Cisco has two strikes against it.
When one notices that price is also testing the olive/gold line of the upper two-standard-deviation band (approximately 32), which prices rarely remain above, it becomes clear that those with long exposure should exit their positions, or at least exit them upon a break of $30. With earnings due after Tuesday's close, and shorter-term degrees of trend (daily bars, not shown here) diverging with waning momentum vs. this month's string of higher highs, the smart money is seeing these three strikes as an opportunity to sell Cisco into the close.
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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.