“Load Up the Truck” with Cisco

03/25/2011 7:00 am EST

Focus: STOCKS

Shares of the networking giant show a multi-year pattern of taking a beating post earnings before bouncing back higher, and with history seemingly repeating itself, buying in now could yield sizable gains.

One of the most unloved stocks over the past five weeks has been Cisco Systems (CSCO). Ever since the company reported earnings, the price has been steadily declining.

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In fact, looking at the three years on the chart above, there is a pattern of this happening. This chart also points out that CSCO has been unloved since May 2010. But since then, there have been what I call “three sheets of rain” coinciding with the previous three earnings announcements.

These sheets set a bottom and then rose up before gapping to start the next sheet. Is the fourth sheet forming now? Let’s examine this more closely below.

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This pattern has fascinated me. The bottoms for each of the previous three earnings announcements were found at whole numbers, $21, $20, and $19. That told me right away that this time I shouldn’t even consider buying the stock until it hit $18.

Each previous earnings price fall also had the Moving Average Convergence Divergence (MACD) confirm the move higher after the bottom. The first was a little messy though.

Also, each time, the Relative Strength Index (RSI) bottomed near 30 and then rose all the way back to 70 and the price rose to, or through, the 200-day simple moving average (SMA).

This is why it is time to load up the truck on shares of CSCO. The RSI is now moving back above 30, and the MACD is crossing positive, confirming the recent four-day upward price move. Using the previous price moves with the coincident move in RSI from low to high would project a price target of $20.28 to $21.34.

The previous moves to the 200-day SMA suggest a target of about $21.22 (but sinking) within that range. And there is a Fibonacci level where each of the three previous runs has stalled at 20.67.

The lone troublesome issue from a technical perspective is the downtrend support line that connects the three previous bottoms. It broke below this line and gapped lower recently, and this line now acts as resistance.

Looking at the history of this stock, even if you are a little late to the party and aren’t able to grab it at these levels, you’ll likely still be rewarded at higher prices.

By Greg Harmon of DragonflyCap.com

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