Don't Let the IBM Herd Drag You Over a Cliff

 | Apr 19, 2017 | 2:00 PM EDT
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Yes, we think Watson is pretty amazing; perhaps the most life-changing technology ever created by any company in history, but that has little to do with the next couple of years. What does? We do. All of us.

It turns out that we, the herd of investors around the world, act very similarly around emotional issues. And there's no issue more emotional than money.

No matter how much we want to buy low and sell high, most humans just can't act rationally at key moments of price movements -- highs and lows. Once a new trend direction is clear, we can see that the old trend has ended, and eventually find the reasons that allow us to join the new trend. Unfortunately, this is most often near the end of the new trend. This is called "herding," like sheep that follow the sheep in front of them.

The bad news, apparently, is even when we know we act this way, we can't stop. The good news is that it's so predictable that we can often see trend changes coming in advance by taking the temperature of the herd's mood. Our DSE (decision support engine) has become the go-to tool for measuring this phenomenon. Readers of these pages might recall the last time our DSE took the temperature of IBM; Jan. 16 of this year.

On the day of that analysis, with IBM (IBM) around $170, DSE allowed us to warn that the stock should be "sold this month." IBM rose for another couple of weeks into February, and peaked near $180, the top of the pink sell zone shown in the chart posted the day of that analysis. That chart also showed the DSE's forecast for the new trend that should last throughout 2017 -- a decline to at least the $140 level.

Today's chart, below, shows the trend at one higher degree than the January chart. It's the monthly bar chart, and warns of a much more ominous outcome than just $140. With several DSE components now giving multi-year sell signals, the highest probability outcome is for a decline toward $120 +/-$10 in the coming 12-18 months.

IBM Chart
 
Watson or not, the temperature of the herd became feverish into the January/February highs, and IBM now needs to take some medicine (time) to allow the fever to subside.

Price has departed the "hot" zone of $175 +/-$5 and is heading toward "cooler" conditions below $130, perhaps $110. The earnings miss this week is unlikely to be the only negative news that arrives in the coming quarters, with the worst news showing up as price tests $120 +/- $10.

Therefore, if long and wrong IBM here, the DSE suggests using selling actions on any bounce back toward $170 +/-$2, as well as upon a close below $158. Otherwise, prepare for the herd's emotions to drag you over the cliff with it as it pushes price down through the $150s, $140s, and perhaps the $120s.

For updates on this analysis, as well as other trading opportunities, try our DSE Alerts service for free for a couple of weeks, or contract us at support@dsetrading.com.

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