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With the huge increase in volatility over the last couple of weeks, very few stocks that had upward-sloped trend channels were able to maintain them. I looked at chart after chart where stocks had been in upward-sloped trend channels for the last two or three years, but had broken below that trend in recent weeks.
Cisco Systems (NASDAQ: CSCO) was one of the few stocks that looks as though it will close within its channel again this week.
Before we get to the weekly chart and the channel, let’s look at the daily chart. At first glance, there isn’t much that jumps out from the chart, but looking at the 10-day RSI, we see that it dropped below the 20 level earlier this week.
I looked back at the last five years, and the indicator has only gone below the 20 level five times during that period. With a 30 RSI being considered oversold, a reading of 20 shows an extremely oversold stock.
The weekly chart is where we see the trend channel that has helped dictate the stock’s price levels for the last 3 ½ years. The lower rail of the channel is right at $25. It was breached sharply on Monday, but the stock has rallied back in the last few days just like the rest of the market.
I find it interesting that two other instances where the stock hit the lower rail of the channel were weeks in which the stock was significantly lower and rallied back. I have marked those instances with blue circles. In each of those two instances, the stock rallied significantly in the next five or six weeks.
The sentiment toward Cisco stock is a little bit of a concern, with a short interest ratio of only 1.69 and analyst ratings that are a little more bullish than average. In all there are 23 “buy” ratings on the company, 12 “holds” and four “sell” ratings. I did find it interesting that in the last two years there have been six downgrades and only one upgrade. What this suggests is that while the sentiment is skewed toward optimism, it isn’t as optimistic as it was a few years ago.
I shared my thoughts about the overall market on Tuesday, and I am still a little concerned that we may be heading in to the next bearish phase. But that remains to be seen.
Even though I think investors need to proceed with caution toward the overall market, I think Cisco rallies in the next five to six weeks. I would be looking to buy the stock below the $26.50 level and then looking for a gain in the 15%-20% range over the next five to six weeks.
After that, I would look at the overall market and Cisco stock itself and re-evaluate whether I wanted to take the profit or not. On the downside, I would set a stop-loss at $24, as I think if moves below that level again, it will continue lower for a while.
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