Cisco Could Add to Impressive Gains After Earnings

Dow component Cisco Systems, Inc. (CSCO) awoke from a long slumber in 2017, surging more than 25%, and has posted impressive gains so far in 2018. The networking giant has added another 20% since the first trading day of January, lifting to the highest high since the internet bubble burst in 2000. More importantly, the stock has ignored broad market volatility, posting new highs while the-tech heavy Nasdaq-100 remains stuck under stubborn resistance. 

This resilience bodes well for Wednesday's fiscal third quarter earnings release, when the company is expected to report earnings per share of 65 cents on $12.4 billion in revenues. Solid metrics and a bullish outlook should generate continued upside that lifts the stock above $50 and into the next major obstacle just below $54. In turn, that translates into favorable reward:risk for new positions, given current price action in the mid-$40s. (See also: Why Cisco Systems Is Virtually Unavoidable.)

CSCO Long-Term Chart (1997 – 2018)

The company came public in February 1990 and entered an immediate uptrend that topped out at a split-adjusted $2.27 in 1994. It fell more than 50% into 1995 and resumed its upward trajectory, entering a historic advance that posted an all-time high in the low $80s in March 2000. The stock got crushed in the next 2.5 years, dumping more than 70 points into a five-year low in the single digits.

A bounce into 2004 stalled in the upper $20s, well below the .382 Fibonacci bear market retracement level, giving way to a decline that generated gross underperformance during the mid-decade bull market. The stock turned higher once again in 2006 and topped out in the mid-$30s a year later, with that print marking the highest high for the next nine years, ahead of a steep decline that held above the 2002 low during the 2008 economic collapse.

The stock tested that deep low in 2011, completing a long-term bottom, and entered a shallow uptrend that finally reached the 2007 high in 2017. A November gap between $34 and $36 signaled a historic breakout, generating a 12-point rally into March 2018. A pullback into April attracted committed buyers, ahead of a bounce that tagged a 17-year high last week. The monthly stochastics oscillator lifted into the overbought level after the breakout and has held that bullish cycle for the past six months, confirming the strong uptrend. (For more, see: If You Had Invested Right After Cisco's IPO.)

CSCO Short-Term Chart (2017 – 2018)

The rally into the first quarter of 2018 stalled at the 50% retracement of the 2000 to 2002 downtrend, generating two months of testing that could yield a breakout after this week's earnings report. That buying surge would open the door to the .618 retracement level just below $54, marking a barrier that is likely to slow or stall progress while offering an opportune exit for longer-term positions.

The pullback into April 2018 found support at the .382 retracement of the short-term uptrend, while strong price action into May has completed an inverse head and shoulders pattern that targets $52 following a breakout. This is consistent with the long-term Fibonacci analysis, adding weight to a prediction that buyers will struggle to maintain control after the stock lifts into the low $50s.

On-balance volume (OBV) surged to a decade high in February 2018 and tested that level in March. The indicator failed to confirm last week's breakout, with a large chunk of sidelined capital keeping powder dry until this week's confessional. Sellers will find it hard to break this bullish setup, with a breakdown through the 50-day exponential moving average (EMA) at $43.50 needed to force shareholders into a defensive posture.

[Check out Chapter 6 of the Technical Analysis course on the Investopedia Academy to learn more about using Fibonacci retracement levels to develop your trading strategy]

The Bottom Line

Cisco Systems has attracted substantial buying interest since breaking out to a multi-decade high in 2017 and could add to impressive gains following this week’s earnings report. (For additional reading, check out: Goldman: Tech Regulation to Benefit NVIDIA, Cisco.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>