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I received a bearish signal on Cisco Systems (Nasdaq: CSCO) when I ran my scans the other night. When I pulled up the chart, I couldn’t believe the number of things going on with the chart. The first two things that stood out were the upward trend and the overbought level on the stochastic readings.
Looking at the chart a little longer, I noticed the gaps in prices and assumed that those were earnings dates. Never being satisfied with an assumption, I looked the dates up and sure enough the big gaps I have marked on the chart are the last four earnings dates. Even after the gaps, there is a pattern. Can you find it without reading the text boxes in the chart below?
After each gap, the stock continues in the same direction as the gap for another four-five weeks and then it reverses course. In August, November and February the stock gapped lower and then moved even lower over the next month—almost exactly to the day. One month after the gap down, the stock reversed course and rose by at least $2 each time. On May 14, the stock gapped higher and has been rising since that time. Is the pattern going to play out on the opposite side, meaning that the stock will rise until approximately June 14 and then it will reverse course and drop by at least $2?
When we look at the weekly Cisco Systems stock chart, we see resistance at the $26 level. This price level halted a rally in April 2010 and then again last July. If the stock were to rise over the next two weeks, the resistance would likely come in to play a third time. It should also be noted that the stock is overbought on the weekly chart as well. I circled the last few times that the stock rolled over and how the RSI and stochastic readings were both showing overbought readings at the same time. We are seeing that again now.
The sentiment toward Cisco Systems stock is mixed with the short-interest ratio and the analyst ratings leaning toward the overly bullish side while the put/call ratio is leaning toward the overly bearish side.
So how do you play CSCO at this point? I would wait another 10 days or so and see where the stock price is at that point. If it is up near the $26 level like I suspect, I would look to either short the stock or buy some July puts on CSCO. If the pattern repeats itself, the stock should fall between 15-25%. This would put the stock in the $19.50 to $22 range. With the low prices on Cisco Systems stock options, you should be able to get a double on a drop of 15% or more.
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