International Business Machines Corp. (NYSE:IBM) rallied sharply last week — like much of the rest of the U.S. stock market — following the results of the 2016 U.S. presidential elections. As a result, IBM stock is now flirting with a more substantial chart breakout. Naturally, active investors and traders would be wise to keep a close eye on this.
Before looking at the charts of IBM stock, though, allow me to to say a couple of words on the post-election rally in stocks, pertaining to investor psychology.
As I always reiterate in this column, building up large trading positions ahead of major news events (earnings events, election results) is a low-probability trading strategy. While I know some traders who got lucky last week and captured a good portion of the rally, they actually were positioned for a Hillary Clinton win.
In other words, yes, those traders made money … but they did so for all the wrong reasons. Very few market participants were positioned for a major stock market rally following a Donald Trump victory.
With the election over, I am hearing two predominant views on the post-election rally:
- The stock market has now fully priced in any potential good that could come from a Trump presidency.
- The “short covering” rally last week was just the beginning of a much larger stock market stampede higher, as economic growth is to resume.
While I respect both views, it’s too early to tell, in my humble opinion. Still, we must respect the price action.
IBM Stock Charts
On the multiyear weekly chart, we see that IBM stock at its February lows had retraced a full 61.8% of the entire rally off the late 2008 lows into the 2013 highs. This retracement number of course is important through the lens of Fibonacci analysis.
The rally off the February lows has been systematic and orderly, and on the back of last week’s 5%-plus lift, the stock is now knocking up against the diagonal resistance line from 2013.
The year-to-date price action also has IBM stock developing a series of higher lows and higher highs.
By zooming in a little further on the daily chart, we see that IBM stock last Friday also arrived at a more intermediate-term resistance line after once again bouncing off its red 200-day simple moving average.
Upside momentum — as represented by the MACD indicator at the bottom of the chart — is also turning back up, thus supporting a potential breakout above the August highs around $164.
If and when IBM stock can overcome and hold above $164, it could open up a next upside target around the red 200-week SMA from the above chart. The 200-week moving average currently resides around the $170 area.
Over the next few weeks or months, any break and hold below the 200-day SMA (currently near $150) would be a sign to get out of any intermediate-term long positions in the stock.
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