History shows that companies that stand the test of time and thrive for decades do so by surviving their consolidation phases. Depending upon how fast, and how high, a company's stock price climbs before the major consolidations will determine how scary the consolidations will be. Investors who entered their exposure to the company early will have more staying power than those who entered late in the company's rise.
Therefore, it is important to understand where the stock price has come from, so you can gauge (ideally before you enter) if you will be able to survive the consolidation that is normal, needed, and essential along the path to multi-decade success -- not only for the company, but also for the success of your investment.
This monthly bar chart of IBM shows the price behavior that ended a 10-fold rise from the early 1960s (near $2.50) into its 1987 peak (near $26), and consolidated into the 1993 low (near $7.50), a 72% decline. This occurred while the company absorbed its prior success, and prepared for the future.
From 1993 to 1999, IBM shares grew 14x, rewarding those with a post-consolidation vision very richly. From 1999 to 2008, share prices went into another consolidation (with a maximum high-to-low amplitude of 60%), before its next growth phase took it from around $60 to around $200 by early 2013, again rewarding those with insight into the historical pattern a handsome 3.3x return. The consolidation since that peak has only seen a maximum amplitude of 35% so far, making it the least painful test of Big Blue faith in 50 years.
However, the current setup puts IBM's technicals at the most oversold condition since 1993, when the monthly stochastics (lower pane on the chart) were last below the 10% extreme oversold threshold. In addition to this measure of extraordinary crowd loathing, the mid-month test of $130 reached below the lower two standard deviation band (olive/gold bands above and below the price bars) below the 200-day moving average.
Two standard deviations contain 95% of normality. As if that wasn't enough reason to begin building long exposure, or adding to existing positions, the August price low, near $140, tested the four standard deviation band (which contains 99.9% of normality), not shown on the chart above. This waning of selling intensity (only reaching the two standard deviations this month, vs. the four standard deviations in August), while reaching lower price levels than in August, sets up a bullish divergence buy signal at the recent test/reversal of $130. This is the zone of expected price support that our DSE (decision support engine) forecast in late September, which we published at TheStreet.com.
Finally, the price pattern has arrived, like it did in 2008 (into the bright green box), and reversed. If the pattern from 2008, as well as 1993, holds, IBM should be completing another consolidation in this price and time window, with a multi-year forecast for prices to journey back to $200 (if a consolidation like 2002-2008 repeats), with more bullish potential, thereafter.
This 50%+ forecast rise in price in the coming 18-30 months anticipates a new phase of growth for IBM. Whether through new products and/or services, or perhaps a strategic acquisition that the crowd isn't anticipating, the next few years should find news that is much kinder to the company than that of the past few.
Our objective DSE, therefore, prioritizes the following actions (which are buying actions only). If short, protective buy stops should be placed at $140, so that profits from short positions don't dwindle, or become losses as IBM moves up through the $150s. If flat, use any weakness into $135 +/-$1.50 to establish long exposure, as well as using a close above $145 to do so if no weakness arrives first. If long, use these parameters to maintain or add to that exposure.
