Updated from 11:09 a.m. EDT
International Business Machines
is the third strongest member of the
, right after
. That's a great position for the godfather of the modern computer era, given deep selling pressure throughout the tech universe in 2008. This strong performance should continue well into the second quarter.
Big Blue has seen its fair share of ups and downs over the years. The company's near monopoly on computer hardware was broken in the 1980s, inducing many analysts to predict its ultimate demise. But it refused to fade away, adding a host of innovative products that addressed the full range of hardware and software applications.
This stock is a big deal for Main Street because it's been a fixture in public investor accounts for over 30 years. As an example, back in the 1980s, my mother-in-law used to boast about the solid performance of her 2,000 shares. Now she's in her 80s and IBM is the sole holding left in her retirement account.
She still brags about her investment prowess, which makes sense given that shares have risen fourfold in the last 20 years. But truthfully, the majority of those gains were booked in the 1990s when the entire tech universe was trading up to bubble highs. The good news is the stock continues to outperform other tech stocks by a wide margin.
Let's review IBM's long-term history, and then see where the stock might be headed in the next six to 12 months. This exercise should help long-time investors understand its considerable impact on their accounts, while giving interested parties the information they need to decide if now is the right time to buy this blue-chip giant.
IBM - Monthly Chart
The monthly chart shows IBM starting a strong uptrend near $10 (post-split) in June 1993. If we zoomed back to the 1973-74 bear market, we'd find this level marked the low for the period, with price oscillating in a trading range that peaked in the $40s just ahead of the 1987 crash.
The stock returned to its pre-crash high in 1997 and broke out. The subsequent rally posted a 300% gain in the next two years, with the uptrend stalling out near $139 in July 1999. Price then dropped into a 40-point trading range, while the rest of the stock universe topped out and headed into a major bear market.
This broad range broke to the downside in 2002, triggering a 30-point slide that dropped the stock to its bear-market low at $54.01 in October of that year. Notably, neither the high posted almost eight years ago nor the low posted over five years ago has been breached between 2003 and the present date.
Price action since the 2002 low shows two distinct rally legs, with a pullback between 2004 and 2006. The stock is currently trading near a six-year high that's challenging the midpoint of the 1999 to 2001 trading range. This price level has proven to be tough for the issue, which has shown little progress since last July.
IBM - Weekly Chart
The weekly view highlights the strong run between $72 and $122, as well as the volatile pullback that began last July. Note how the stock retraced exactly 50% of its 2006 to 2007 gains before bouncing strongly in January. That recovery attempt stalled near the seven-month high, with price consolidating in a tight pattern for the last four weeks.
The stock could be marking out either a double top or breakout pattern. The outcome is ambiguous because it's too early to tell which side will take control in the next few weeks. At a glance, though, it looks like selling pressure is increasing, raising the odds for a pullback that drops into support between $109 and $112.
I'd be an aggressive buyer on that decline, as long as the stock holds support for a two-week period. This pullback scenario should yield a renewed thrust to the high that completes the bullish equation and triggers an uptrend extension that finally lifts price into a test of the 1999 peak in the $130s.
IBM - Daily Chart
Finally let's zoom in and take a look at the daily chart. Unusually strong resistance at $120 is easy to visualize in this close-up view. I count at least four reversals in the last eight months, making it hard for prospective investors to take on risk at current prices. There's also little or no evidence this persistent barrier is getting ready to break.
This resistance increases the odds for the pullback scenario outlined in my weekly analysis. The chart shows a broad support zone between $109 and $112 that marks the Feb. 26 breakout above the three-month basing pattern. It looks like gravity will take over soon and drop the stock into this level.
The 200-day moving average is rising to the bottom of this support, which may act as a price magnet on the decline. This sets up the likelihood of a good dip trade for short-term players, as well as the longer-term entry signal noted above. In both cases, patience will be required as price moves into a more favorable risk/reward profile.
With first-quarter earnings season just ahead, it's likely that news shocks will trigger the movement of IBM's stock into a breakout over $120, or the pullback play under $110. The company is scheduled to report earnings on April 16, so it won't be long before Big Blue finally sets up and pulls away from current levels.
Know What You Own
: IBM is a component of the
Dow Jones Index
and some of the other stocks in that index include
. These stocks were recently trading at ($45.99, +7.08%), ($86.01, +1.69%), ($29.25, +3.07%) and ($21.25, +1.53%)respectively. For more on the value of knowing what you own, visit TheStreet.com's
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Farley is also the author of
, a premium product that outlines his charts and analysis. Farley has also been featured in
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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