Dow component Cisco Systems, Inc. (CSCO) heads into fiscal second quarter earnings on Tuesday evening in an adverse market environment suddenly obsessed with interest rates. That theme has had a major impact on the Dow Jones Industrial Average, dropping the venerable instrument more than 3,000 points in two weeks. Big tech has suffered as well, dumping the Nasdaq 100 more than 10%, suggesting that the networking giant will have a tough time gaining traction, regardless of quarterly results.
Cisco stock has been on fire since breaking out above 2007 resistance in the mid-$30s in November 2017, lifting nearly 30% into the mid-$40s. It topped out in January and sold off but is now trading well above the deep low posted on Feb. 6. This resilience could generate a test of the rally high in reaction to a strong report, but a fresh trend advance seems unlikely given current headwinds. (See also: Cisco Traders See Stock Rebound Despite Weak Growth.)
CSCO Long-Term Chart (1990 – 2018)
Cisco stock began life as a penny stock in 1990, entering a steady uptrend that posted eight splits into 2000 when it topped out at $82. It lost significant ground when the net bubble burst, dropping to $8.12 in October 2002. That marked the lowest low in the past 15 years, ahead of a bounce that stalled seven points below the .382 Fibonacci sell-off retracement level at $36 in 2004. The stock underperformed badly into 2006, settling in the mid-teens ahead of a final rally burst that ended five points above the 2004 high in October 2007.
It plunged with world markets during the 2008 economic collapse but held above the 2002 low, bottoming out in the lower teens. A bounce into the new decade failed to gain traction despite the broad tech recovery, with aggressive sellers taking control in a decline that undercut the bear market low by 31 cents in 2011. That marked a historic buying opportunity, ahead of a recovery that reached the 2007 high in March 2017.
A rounded correction into November 2017 yielded a dramatic breakout that finally cut through the .382 retracement level. The uptick stalled about two points below the 50% retracement in late January, while the decline into February has tested harmonic support in the mid-$30s. The monthly stochastics oscillator entered a long-term buy cycle in August 2017 and is holding above the overbought line, despite several weeks of higher-than-normal volatility. (For more, see: Cisco Surges to 17-Year High on Revenue Forecast.)
CSCO Short-Term Chart (2015 – 2018)
The uptrend into 2015 stalled four points below the 2007 peak, yielding a choppy correction that reached a two-year low in the first quarter of 2016. It bounced back to resistance in the fourth quarter and entered a shallow uptrend that hugged the 50-day exponential moving average (EMA) before ejecting into a vertical trajectory. Price action between August 2017 and January 2018 posted the most prolific gains since the bear market bounce in 2009 and 2010.
The stock posted a breakaway gap between $34 and $36 after November earnings, with a pullback into that price zone offering a low-risk buying opportunity. That could happen if Cisco fails to hold the Feb. 6 low at $37.35. A higher low at $38.23 just three sessions later reinforced support at that level, which roughly corresponds with the 50-day EMA. On the flip side, two bounces have stalled near $41.50, marking a line in the sand between bull and bear power.
On-balance volume (OBV) exited a long-term distribution phase in February 2016, gaining limited ground into the second half of that year. The indicator went to sleep into the middle of 2017, signaling shareholder apathy consistent with the stock’s long-term underperformance. That changed in the fourth quarter when Cisco stock entered the most dramatic accumulation phase so far this decade, lifting to the highest high since 2011. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)
The Bottom Line
Cisco Systems stock is solid as a rock heading into earnings, with strong accumulation and price action, despite broad market headwinds. However, it is unlikely to sustain new highs in this adverse market environment, suggesting an intermediate trading range in the upper $30s or low $40s. (For additional reading, check out: Cisco Could Be the Next Microsoft, Says Bernstein.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>