We’ve opened a bearish trade on Cisco Systems (CSCO). After the market rebounded for a few days, it has started to fall once again, and it’s bringing CSCO down with it.
CSCO just completed a bearish “flag” pattern and, based on the height of this continuation pattern, we are setting our initial price target at $22. Of course, to reach this level, CSCO is going to have to break through a long-term support level at $22.50 — which was hit first in April and May of 2014, again in October 2014, and most recently last month.
However, while there may be some support between the stock and our $22 strike price, we think the bearishness in the lead up to the company’s earnings announcement on Feb. 10, after the market closes, should be strong enough to get us there. CSCO’s last earnings announcement was a disappointment, and we expect more of the same this quarter with a continued slowdown in global growth.
Oppenheimer downgraded its outlook for CSCO recently, citing Juniper’s (JNPR) weak guidance for the first quarter and continued macro weakness in China.
Cisco is also facing pressure from the growing support for Facebook’s (FB) Open Compute Project (OCP), which would create open-source designs for networking hardware, among other things. With telecom giants like AT&T (T), Verizon (V) and Deutsche Telecom jumping on the OCP bandwagon, CSCO may start losing market share.
Here’s our short-term trade to capitalize on it:
‘Buy to open’ the CSCO March 22 Puts (CSCO160318P00022000) for a maximum price of $0.65.
We are going to evaluate this trade just before the earnings report. If we are sitting on a solid profit, we may exit the trade before CSCO reports.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.