This Stock Offers Good Reward-to-Risk

Shares of Cisco Systems, Inc. (NASDAQ:CSCO), while still higher by more than 5% for the year, took a big beating following the company’s latest earnings report on May 18.

The stock has been locked in a sideways consolidation phase since, but increasingly looks ripe to break out of this range in one direction or another, which would then set up a trade with well-defined risk.

Before looking at the charts I would be remiss not to point out the 3.6% dividend yield that CSCO stock currently sports, which is notably better than an “alternative” 2.15% yield in the 10 year US Treasury Notes.

To see both sides, however, one must also recognize that in the United States we find ourselves in a marginally increasing interest rate environment, which is to say that this dividend yield alone may not be enough to keep a bid in the stock since the more interest rates rise, the less attractive this dividend yield looks in relative terms.

With all of that in mind, let’s gain some perspective from the charts and work our way toward a trade idea.

CSCO Stock Charts

On the multiyear weekly chart, we see that just before the latest earnings announcement, shares of Cisco traded at the very upper end of their multiyear up-trending range, which following the earnings report promptly got rejected.

As a general trend-following rule, it rarely pays to chase stocks higher at the upper end of their range, just like reward to risk on the short side is weak at the lower end of these ranges. In that vein and through the lens of this time frame, the stock remains in the upper half of its trading range. Keeping the time-frame in mind however it is important to understand that it can take considerable time for the stock to move back to the lower end of its range.

In other words, while long-term investors may over time find better (lower) levels at which to buy CSCO stock, this does not have much to do with the near-to-possibly-intermediate term.

On the daily chart, we see that CSCO stock tumbled notably after the May earnings report, which also snapped its 100- and 200-day simple moving averages (blue and red lines respectively). While the stock remains trading near its 200 day moving average and just below horizontal resistance, the stock has not seen any further selling pressure beyond the one-day reaction after earnings.

Ultimate this stock will need to break out of this narrow multiweek trading range, either to the upside or to the downside. The beauty of trading is that we don’t have to take a guess on which direction the stock breaks until it actually triggers a breakout.

Thus, I would be a buyer of CSCO stock upon a clear daily close above $32, which could then start to fill the May down-gap and get the stock moving up into the mid $30s. Alternatively, should the stock register a daily close below $31, then a new leg lower could open up into the $29 are as a next support area.

Wait for a trade to set up and don’t jump the gun. Patience is a virtue.

— Serge Berger

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Source: Investor Place