Chart of the week: How to trade Big Blue shares now

Currently at a crossroads, our chartist plots the future for this granddaddy of the global tech industry.

IBM is at a crossroads

International Business Machines (NYSE:IBM) is the granddaddy of the US tech industry. It was the computer pioneer that set the early trends – at least until Microsoft (NASDAQ:MSFT) with its revolutionary Windows software came along. I have fond memories of the IBM 360 mainframe in the mid-sixties when I was a post-grad student.  The monster was housed in its own dedicated clean room and only approved personnel were permitted anywhere near the beast.

I punched out cards using Fortran language, handed them to an operator and next morning (if the machine had not broken down) was handed the results. Happy days!  But I digress.  

Of course, being in the hardware business when software was starting to boom was not a road to riches.  Hardware became a commodity when PCs arrived and margins were slashed. That is when IBM shares languished in the wilderness. In 2014 it recorded its lowest quarterly sales ever.

And last year it acquired Red Hat – a software company. Better late than never!

The monthly chart tells the story this century:

Source: interactive investor     Past performance is not a guide to future performance

From the 2009 Credit Crunch low, the shares embarked on a solid advance (as did many other shares, of course) as the new quantitative easing (QE) money found its way onto the stock market.  

It made a high of $214 in May 2013 and since then has declined in two major waves to the Fibonacci 76% retrace on a momentum divergence.  And that was the ideal setup for a decent bounce, which is currently in progress.

But what is the likelihood for further gains in the near term? After all, odds have now swung to my bearish case for the US indexes (IBM is one of the 30 shares in the DJIA).  

Only last week, signs of a major top were signalled. If the indexes are heading south, can IBM be far behind?

For clues, let's zoom in on the shorter time frame:

Source: interactive investor     Past performance is not a guide to future performance

My tramlines are interesting. The lower one sports a Prior Pivot Point (PPPs are a series of minor lows or highs made before the market enters the trading channel) in April 2016 that anchors that line as support into the future – even over two years (markets have long memories). 

The market hit that line in October, bounced in wave a then dipped in wave b, taking it below the line and formed an ‘overshoot'. Overshoots usually are selling climaxes that herald sharp reversals.  

And that is precisely what we saw last week with the shares shooting up to the $135 area in wave c. But that is exactly where solid chart resistance lies. And I detect a likely small five-up in wave c that may be complete at Friday's high.

The bottom line is that the shares are currently at a crossroads with a likely near-term decline ahead that could lead to a re-test of the wave-b low at $106. Only a push above the $150 level would cancel out this bearish scenario, which I consider less likely.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.