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HEAD & SHOULDERS


Cisco Undergoing Bullish Breakout

08/11/10 11:18:50 AM
by Chaitali Mohile

Cisco is likely to see the demand for its stock increase.

Security:   CSCO
Position:   Buy

After initiating an intermediate correction from$27.72, Cisco (CSCO) plunged below the 200-day moving average (MA) support. An overheated downtrend stopped the fall and formed an inverted head & shoulders -- a trend reversal formation. The selling volume was higher till CSCO formed two lower lows at 22.5 and 20.93 levels. However, the buying pressure increased as the stock surged from 20.93 levels toward the potential resistance near 23 levels. We can see in Figure 1 that the stock has rebounded from this resistance, forming two peaks: the left shoulder and the head. As soon as CSCO retraced from 23 levels, the buyer's volume strengthened, thus confirming the inverted head & shoulder pattern. The resistance at 23 levels is the neckline of the pattern.

FIGURE 1: CSCO, DAILY
Graphic provided by: StockCharts.com.
 
The full stochastic (14,3,3) that had slipped below the bullish level at 50 has turned its direction upward, indicating a positive momentum. The average directional index (ADX) (14) descended from the overheated downtrend, confirming the trend reversal formation. The moving average convergence/divergence (MACD) (12,26,9) in Figure 1 has shifted in positive territory. Considering all the technical aspects, the inverted head & shoulders would undergo a robust bullish breakout. We can see that CSCO has already breached the neckline and the 200-day MA resistance and has sustained the newly formed support. Traders can trigger long positions at this breakout level with the target of $27.23.

The potential target of an inverted head & shoulders pattern is measured by adding the length of the head to the breakout point, and therefore, 23.96 - 20.93 = 3.03 + 24.20 = 27.23 is how the minimum estimated for CSCO is calculated. This target would attract short-term traders and investors.

FIGURE 2: CSCO, WEEKLY
Graphic provided by: StockCharts.com.
 
According to the weekly chart in Figure 2, the price of CSCO struggled for the support as well as resistance of the 200-day MA. Since mid-2009, the 200-day MA support was frequently challenged by the stock. Although CSCO made a new high at 27 levels, the stock failed to sustain the new levels and retraced to retest the 200-day MA support. Later, the same support was breached due to the increasing selling pressure. However, the ADX (14) could not develop the stable downtrend. The stochastic oscillator turned highly oversold, and thus, a fresh upward rally was born.

CSCO is now ready to breach the 200-day as well as the 50-day MA resistance. In Figure 2, the stochastic is ready to surge above 50 levels, offering a low-risk buying opportunity. In addition, the climbing positive directional index (+DI) of the ADX (14) is likely to develop a new uptrend for CSCO.

Thus, the big picture of CSCO is very healthy and attractive for anyone looking to buy its shares.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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