Warning: This Stock Could Move Lower

February 23, 2017
By

Shares of Cisco Systems, Inc. (NASDAQ:CSCO) have rallied roughly 8% since Feb. 10 without much of a breather.

CSCO stock now increasingly looks to be in need of a pause as it has bumped into a key technical area of resistance, before it may stand a better chance again of resuming its multi-year up-trend.

Before looking at Cisco’s charts below, allow me to remind ye faithful of the importance of understanding the correlation among stocks.

Unlike other asset classes — such as commodities and to some extent currencies — stocks in general tend to be highly correlated.

While the price of pork bellies has little correlation with, say, the price movement in crude oil (both commodities), about 80% of stocks on average tend to move up and down together.

In other words, on down days in the stock market about eight out of ten stocks on average will tend to drop, and vice versa on up days.

This statistic holds particularly true in strong up or down trends, such as what we have witnessed on the upside since the U.S. election results from last November.

Looking at the current juncture in the stock market as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), we see a broader stock market that has not had a down day of 1% or more in about three months and that from a momentum perspective looks well exhausted.

As I always say, markets can continue trending in one direction or another regardless of overbought or oversold readings, yet the odds of overstaying ones welcome also significantly increase over time.

What does all of this have to do with CSCO stock?

To my eyes, shares of Cisco are now reaching a critical technical resistance area just as the broader stock market, too, looks to be at risk of a pause if not an outright mean-reversion move lower.

CSCO Stock Charts
On the multiyear weekly chart, we see that CSCO stock over the past few days has reached its reaction highs from the year 2007.

Also note that the stock is getting closer to reaching the upper end of the multi-year up-trending channel (marked by the purple-dotted parallels).

While Cisco stock ultimately can and likely will overcome this technical area of confluence around the $34 area on a more sustainable basis, for the time being the stock likely needs to consolidate before taking this next leg higher.

On the daily chart, we see that CSCO as a result of the latest two-week breakout rally has reached a notable overbought reading in its Relative Strength Index (RSI) at the bottom of the chart.

Last time Cisco’s RSI reached such overbought readings it was late 2014 and the stock promptly corrected 6% over the course of a couple of weeks.

From here, while CSCO stock in and of itself has yet to flag a bearish reversal, any break back below $33.60 could be an initial warning sign. Moreover, it could be opportunity to trade the stock for a mean-reversion move lower toward the $32 to $32.50 area.

— Serge Berger

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Source: Investor Place



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