Networking and communication devices player Cisco Systems Inc. (CSCO) is set to report earnings on Wednesday after the market close. Wall Street analysts expect Cisco Systems to earn 61 cents per share on revenue of $12.06 billion.
This quarter is a tricky one to predict with any reliability for Cisco Systems, since the company is in the middle of a major transition from a hardware-centric player to a software and services company. Shares of CSCO are down around 6% over the last three months, and up around 6.7% year-to-date.
In a recent note to investors, Raymond James said, "Cisco continues to make progress on its evolution to a more software-centric company, and commentary from its recent analyst meeting is encouraging." With so much cash, there are also several M&A deals that could accelerate the company's current transition.
The current short interest as a percentage of the float for Cisco Systems isn't much at just 0.78%. That means that out of the 4.99 billion shares in the tradable float, 39 million shares are sold short by the bears. However, there is the possibility for some short covering, since the short interest ratio for CSCO stock is 2.2 days-to-cover. We could easily see a multi-day rally post-earnings if the numbers are good and the transition is playing out the way the bulls are looking for.
With this in mind, let's take a look at the chart for CSCO stock and see if it's flashing a buy or sell signal heading into its earnings report this Wednesday post-market.
If you take a look at the chart for CSCO stock, you'll notice that it gapped-down sharply in May from around $33.75 to $29.89 a share with heavy volume. That gap lower was due to a weak quarter, one in which the company blamed uncertainty around government spending due to the new administration.
Following that gap, shares of Cisco Systems have been stabilizing and recovering, with the stock moving from a low of $29.89 to its recent high of $32.25 a share. During that recover, shares have been consistently making higher lows, which demonstrates that -- at least for now -- bulls are actively buying the dips heading into the quarter.
Cisco is trending up 0.4% to $32.22 a share in morning trading on Wednesday, and the stock is starting to spike back above its 20-day moving average of $31.66 a share. This spike on Monday is now quickly pushing CSCO stock within range of triggering a big breakout trade post-earnings.
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Traders should now look for long-biased trades in Cisco Systems either before it reports earnings to anticipate, or after if this stock manages to break out above some key near-term overhead resistance levels at $32 to $32.25 a share with strong volume. Look for volume on that move that registers near or above its three-month average action of 21.60 million shares.
If that breakout fires off post-earnings, then this stock will set up to refill some of its previous gap-down-day zone from May that started near $33.75 a share. Some possible upside targets are its 52-week high of $34.60 to north of $35 a share. Traders can simply stop out or avoid this trade if shares of Cisco Systems drop back below key near-term support levels at $31 to $30.50 a share post-earnings with heavy volume.
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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.