International Business Machines (NYSE: IBM) appeared on my bullish scan the other night due to the stochastic lines making a bullish crossover. At first glance, I didn’t think the setup looked all that great, but then I noticed how the previous crossovers that occurred on the daily chart with the readings in oversold territory had produced some pretty decent gains over the last nine months. As you can see, three of the last four prior to the one that occurred on Friday have produced a gain of 8.5% or more.
The weekly chart shows that the stock is oversold based on the weekly stochastic readings as well, in fact it is the most oversold it has been since last summer. IBM stock has been trending downward since March of 2013 and due to this trend, the 13-week and 52-week moving averages have both made a bearish crossover of the 104-week moving average.
It is also worth noting that IBM has tremendous support at the $170 level after the stock hit the level three times from October through February. If you were looking to buy the stock at a lower level, the $170 area would seem to be the optimal point to buy the stock.
Looking at the sentiment toward IBM, I am amazed that such a blue-chip company could have so much bearish sentiment toward it. The short-interest ratio is currently at 8.5 and the put/call ratio is higher than 87% of the readings from the past year. Even the analysts are down on the company with only four “buy” ratings compared to 20 “hold” ratings and two “sell” ratings.
Given the bearish sentiment, you might expect the fundamentals for IBM stock to be terrible, but they aren’t as bad as I expected. The average EPS growth rate over the last three years is 10%- not great, but not terrible either. The company’s Return on Equity is rather impressive at 86.2%. There are a number of companies that would to have an ROE as high as IBM.
I think there are two ways to play IBM right now. If you are a short-term trader, you could buy the stock here and look for a 10-15% gain over the next month or two. That outlook is based on the daily stochastic crossover and the way the stock has performed in the past when such an event has occurred. The negative sentiment is a secondary driver behind that outlook.
The second way to play IBM stock is more for the long-term investor. In this instance, I would wait to buy the stock down at the $170 level and then look to hold it for at least six to nine months. Should the stock start rallying, the sentiment will shift and drive the stock higher. If you like to use options, you could even sell puts down at the $170 level and collect the premiums. If the stock drops down there and the stock gets put to you, you are getting the stock at the price you wanted all along.
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