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HEAD & SHOULDERS


Oh No, It's Cisco

10/19/05 07:31:16 AM
by Arthur Hill

Cisco has never recovered from the 2004 decline and formed a bearish head & shoulders pattern over the last nine months.

Security:   CSCO
Position:   Hold

On the weekly chart (Figure 1), the stock declined from 29.39 to 17.33 (January-April 2004) and then started a long consolidation. The decline sets the bearish tone and the consolidation represents a pause within the downtrend. A move below the consolidation lows would signal a continuation lower and open the door to a new low. Should the stock hold support, it would take a move above the 2005 highs (20.25) to break resistance and turn the long-term chart bullish.

FIGURE 1: CISCO, WEEKLY. Between January and April 2004, CSCO declined and then started a long consolidation.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Turning to the daily chart (Figure 2), we can expand on the consolidation to see what is happening inside. The picture isn't pretty, as a bearish head & shoulders pattern is forming. Bearish head & shoulders patterns come in two flavors: bearish reversals and bearish continuation. Given the 2004 decline, the current head & shoulders on the daily chart should be considered a bearish continuation pattern. That is because confirmation would signal a continuation of the prior move, not a reversal.

FIGURE 2: CISCO, DAILY. The consolidation allows us to see what is happening inside. It's not a pretty sight.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
Continuation or reversal, the normal head & shoulders analysis techniques apply. The left shoulder formed in March, the head from May to July, and the right shoulder in September. The neckline slopes up slightly and the stock broke this support line last week. However, there is still support around 17 from the February-April lows. Upon a break below 17, the downside target would be to around 13. While this may not seem drastic, it is clear that a support break would be bearish for the stock and the NASDAQ.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
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E-mail address: arthurh@tdtrader.com

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Date: 10/21/05Rank: 4Comment: 
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