Dow component Cisco Systems, Inc. (CSCO) reports fiscal second quarter earnings after Wednesday's closing bell, with analysts expecting earnings per share (EPS) of 72 cents on revenue of $12.4 billion. The stock gained 5% in the session following November's release, beating first quarter earnings and reporting in-line revenues but failing to break October resistance. Cisco shares turned south a few weeks later, setting the stage for a volatile decline into year end.
The company posted stronger 2018 returns than the broad tech universe, with shares gaining more than 13% after positive returns in 2016 and 2017. However, Cisco stock spent most of 2018 stuck in a choppy trading range, running in place while trade tensions and rising interest rates dampened buying interest. Price action hasn't cleared range resistance despite a strong January bounce, raising the odds for another downside reversal.
CSCO Long-Term Chart (1990 – 2019)
The stock rallied strongly throughout the 1990s as a proud member of the four horsemen, a moniker given to the hottest tech stocks of the era. It split an incredible eight times between 1992 and 2000, finally topping out at an all-time high in the low $80s in March 2000, just five days after the last stock split. It got pummeled when the internet bubble broke, descending in multiple waves before bottoming out at a five-year low in single digits in October 2002.
A strong bounce stalled in the upper $20s in January 2004, marking a resistance level that wasn't challenged until a July 2007 breakout made limited progress, stalling after gaining less than five points, ahead of an orderly downturn that accelerated into a full-scale rout during the 2008 economic collapse. However, the stock held well above the 2002 low throughout the bear market, finding support in the mid-teens in March 2009.
A 2011 support test marked a historic buying opportunity, but it took six years for the subsequent uptick to reach 2007 resistance, ahead of a November 2017 breakout that posted higher highs into October 2018's 17-year high near $50. The stock dropped to a six-month low in December, reversing at April support and bouncing through January 2019. The rally into 2018 ended as soon as the stock mounted the 50% retracement of the nine-year downtrend, yielding a test that has now entered its fourth month.
The monthly stochastics oscillator crossed into a complex sell cycle in April 2018 and is still situated in the upper half of the indicator panel. This matches the convoluted trading range in place since January 2018, with marginally higher prices but horizontal support. There is little evidence that this technical set-up will favor bulls or bears in coming months, raising the odds that the trading range will persist into the second or third quarter.
CSCO Short-Term Chart (2017 – 2019)
A Fibonacci grid stretched across the uptrend that started in August 2017 highlights the importance of the 50% retracement level at $40, with April and December sell-offs ending within a few cents of that level. Structurally speaking, this is a dangerous pattern for Cisco bulls, with two blue lines marking the first 100% retracement of a rally wave since 2016. That pattern's placement at the 50% retracement of last decade's downtrend raises additional concerns, warning that price action may be carving a long-term top.
The on-balance volume (OBV) accumulation-distribution indicator posted a seven-year high in January 2018 and rolled into an orderly distribution phase, carving lower highs into 2019. The red trendline across the top of those highs now marks a major inflection point, with a breakout favoring stronger price action and a potential breakout to new highs. As a result, it's the place to look for technical clues following this week's earnings report.
The Bottom Line
Cisco Systems stock has been running in place for more than a year, caught in a persistent trading range that is unlikely to yield a strong trend, higher or lower, until later this year.