Major Breakout Setting This Tech Stock Up for a Double-Digit Rally

Serge Berger

A look at the long-term chart of communications and IT equipment giant, Cisco Systems (CSCO), shows how the tech stock has suffered. However, the stock has made a series of higher lows coming off the lows of the summer of 2012, and recently confirmed a higher high. Just days ago, the stock broke a multi-year downtrend as well as nearer-term lateral resistance. Over the course of the next few months, the stock is well-positioned to rally another 10%-15%. 

The long-term weekly chart below speaks for itself. The pivotal multi-year downtrend line dating back to late 2007 has recently been broken to the upside. The series of higher lows, and as of last week, a new higher high, has finally led the stock to flip its chart into a bullish posture. As such, traders will want to keep a bullish bias in mind going forward.

Cisco Stock Chart - Weekly
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Cisco Stock Chart - Weekly

From a relative perspective, CSCO has vastly outperformed the broader tech sector as measured by the Technology SPDR (XLK) off the 2011 lows. XLK is up roughly 34% since that time while CSCO is up about 60%. But the stock still has some catching up to do over a longer term period. 

The chart below shows both securities, with CSCO in red and green and XLK in pink. One could argue that Apple's (AAPL) 14.3% weighting in XLK has much to do with the outperformance in recent years. While that certainly was a meaningful contributing factor, CSCO's bullish setup on the charts still favors a narrowing of the gap between the two securities.

Cisco Stock vs XLK Chart
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Cisco Stock vs XLK Chart

Closer up on a daily chart of CSCO, the stock's bullish tone is better understood still. I drew several lateral support/resistance lines on the daily chart, which I will go through one by one for perspective. 

Cisco Stock Chart - Daily
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Cisco Stock Chart - Daily

The key August 2011 low led to a big rally into April 2012 (along with the broader market of risk assets), where the stock left an important medium-term top and reference level near $21.20.


From there, the stock worked significantly lower again as broader market weakness set in due to a slew of disappointing economic data and slowing growth through the summer of 2012. CSCO found a higher low versus the 2011 lows in July 2012, near the $15 mark. For comparison, the S&P 500 found its 2012 lows in early June. 

Once the stock found its summer 2012 bottom, it again slipped on a bull costume and rallied sharply into September. The ensuing sell-off then found a bottom near $16.70 in early November 2012 at a relative higher low versus the summer lows. 

After two higher lows, the stock had enough steam built up to work toward a higher high versus the pivotal April 2012 high. Following a monster rally off the November 2012 lows, the stock consolidated sideways for several weeks in early 2013 before breaking past resistance on March 6 to form the first higher high on the charts since April 2012.

Currently, CSCO is trading more than 17% above its 200-day simple moving average and, as such, is likely somewhat overbought in the intermediate term. Chasing the stock higher here is not a high-probability strategy in my book, but rather a little patience should be rewarded with a better entry price.

Regardless of the near-term overbought levels, the stock's multi-year breakout and solid series of higher lows and higher highs has it poised to rally at least another 10% over the course of the next three to six months. Given the somewhat longer-term time frame for this trade, I would use a slightly wider stop-loss than usual.
 
Recommended Trade Setup:

-- Buy CSCO at $21.80 or lower
-- Set stop-loss at $20
-- Set price target at $24-$25 for a potential 10%-15% gain in 3-6 months

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