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I wrote about International Business Machines (NYSE: IBM) just a few short weeks ago when the company announced that it was purchasing Truven Health Analytics for $2.6 billion. The announcement was unusual in that IBM surged when the deal was announced. Most companies that are making an acquisition usually see their stock price fall.
We see on the updated daily chart that IBM jumped above its 50-day moving average when the deal was announced, and the stock has proceeded to move slightly higher after the announcement.
We see that the daily oscillators moved into overbought territory on the move and the daily stochastic readings recently made a bearish crossover. The bearish cross of the stochastic lines is what brought the stock to my attention again, but something else stood out to me this time around.
When I looked at the weekly chart again, I noticed a pretty tight pattern, but it didn’t really fit my usual trend channel. This is when I turned to a tool I use from time to time called a Raff Regression Channel.
Rather than try to explain the Raff Regression Channel in my own words, I copied this definition from StockCharts.com:
Developed by Gilbert Raff, the Raff Regression Channel is a linear regression with evenly spaced trend lines above and below. The width of the channel is based on the high or low that is the furthest from the linear regression. The trend is up as long as prices rise within this channel. An uptrend reverses when price breaks below the channel extension. The trend is down as long as prices decline within the channel. Similarly, a downtrend reverses when price breaks above the channel extension.
When we apply the Raff Regression Channel to IBM’s weekly chart, we see how the downward trend for IBM is still intact, despite the recent rally.
We also see from the Raff Regression Channel that the rally has only brought the stock price up to the regression line. The weekly slow stochastic readings are quickly approaching overbought levels. The stock faces several hurdles at this point with the upper rail of the channel, the 52-week moving average and the 104-week moving average.
My take is that the IBM rally could continue over the next week or two, but I don’t think it is a good long-term holding. In fact, if it moves back up to the $145 level, I would be looking to short the stock and take advantage of the downward trend.
I noted in my previous article that there was support in the $110-$111 area. That would be my target for the next down leg and where I would look to take profits on a short position.
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