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Big Blue Has Lower Targets

02/11/05 08:39:45 AM
by Gary Grosschadl

Since topping out at the first of the year, IBM has faltered. Lower targets are in sight as two technical tests approach.

Security:   IBM
Position:   Sell

Figure 1 suggests a short-term sell. Longer term, it is still bullish as the stock is above its 200-period exponential moving average (EMA) on both daily and weekly charts and above several trendlines on those charts as well.

On the daily chart, the 20-day EMA served the short-term trader well since it crossed above the 200-day EMA. This exponential moving average proved to be a strong support line as IBM thrusted higher. Since this top, this same 20-day EMA line is just as relevant on the bear side, as it has switched from previous strong support to what is now overhead resistance.

Figure 1: IBM. IBM drifts lower looking for a possible bounce off lower targets.
Graphic provided by:
Hindsight is a beautiful thing. I often mention the importance of multiple divergences, and here, a great example is illustrated. Note the multiple negative divergences (green arrows) shown as the stock pushed higher, yet the lower indicators went the other way. This is a superior trading signal most times, and this was a prime example.

The Chaikin money flow (CMF) indicator also showed an extreme negative divergence. When buying power vanishes, it is a tipoff that bullish forces are abandoning a stock and the stock is due for a downleg.

Two lower targets are shown via the black arrows, the higher one being the oft-mportant 200-day EMA. Stocks often will attempt a bounce at or near this line, and this was the case several weeks ago. Note how this level also coincides with a previous resistance level from last summer.

Should this level of ~ 91.40 fail to hold, then the next possible support level is the previous trendline at $88.50.

In summary, from a short-term trading point of view, I am bearish on IBM until it can sustain itself above its 20-day EMA. A bounce off either target level may give a short-term trading opportunity as a "failure" move to overhead resistance at either the 20 EMA or the congestion area at or near $95.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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