Back up the Truck Mildred, Time to Load’er Up it’s About to Rain

• Posted by Greg Harmon
• on March 23rd, 2011

One of the most under-loved stocks over the past 5 weeks has been Cisco Systems (ticker:$CSCO). Since reporting their earnings the price has been steadily declining.

In fact looking at the 3 year chart below there is a pattern of this happening. This chart also points out that CSCO has been un-loved since May 2010. But since then there have been what I call 3 sheets of rain coinciding with the previous three earnings announcements. These sheets set a bottom and then rose up before gapping to start the next sheet. Is the fourth sheet forming now? Lets examine this more closely below.

This pattern has fascinated me. The bottoms for each of the previous 3 earnings announcements were found at whole numbers, 21, 20 and 19. That told me right away that this time I should not even consider buying the stock until it hit 18. Each previous earnings price fall also had the Moving Average Convergence Divergence (MACD) confirm the move higher after the bottom. The first was a little messy though. Also each time the Relative Strength Index (RSI) bottomed near 30 and then rose all the way back to 70 and the price rose to or through the 200 day Simple Moving Average (SMA).

This is why it is time to load up the truck. The RSI is now moving back above 30, and the MACD is crossing positive confirming the recent 4 day price move up. Using the previous price moves with the coincident move in RSI from low to high would project a price target of 20.28 to 21.34. The previous moves to the 200 day SMA suggest a target of about 21.22 (but sinking), within that range. And there is a Fibonacci level, where each of the three previous runs have stalled, at 20.67. The lone troublesome issue from a technical perspective is the downtrend support line that connects the 3 previous bottoms. It broke below this line and gapped lower recently and now this line acts as resistance. If you are conservative you might wait for the price to break back above this line before buying, it is only a few cents away and it is just starting to sprinkle.

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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