IBM Likely to Break Higher Out of this Range

Shares of IBM have been a serial underperformer for years.  What was once a darling of this bull market in US stocks has now been a whole lot of nothing for 3 years. Since the end of 2011, the S&P500 is up almost 70% with IBM bringing in low single digit returns. It's been a huge disappointment as prices have consolidated and digested those monster gains from 2009-2011. But I believe things are changing for the better.

Here is a weekly line chart of IBM relative to the S&P500 over the past several years. We've been in a beautiful pattern of lower lows and lower highs as IBM has done nothing but underperform. But on the recent lows this summer, momentum is starting to put in a bullish divergence by making a higher low. This is signal number 1 that things could be shifting:

More importantly, from an absolute price perspective, an upward sloping 200-day moving average increases the likelihood that the resolution out of this recent consolidation will be to the upside. Here is a daily bar chart showing a clear symmetrical triangle well-defined by these two converging trendlines throughout 2014. What catches my attention is the fact that on the recent selloff in August, prices failed to reach the lower of the two trendlines. This strength is another warning that the resolution is likely higher:

There are a few ways to take advantage of this. One can buy shares of IBM and short an equivalent amount of the S&P500 to maintain more of a market neutral position. Conservative participants can wait for a breakout from this consolidation as confirmation for a new entry point. Or one can buy pull backs keeping in mind we really only want to be long above that 200 day moving average.

Either way, I think it's worth pointing out what is going on here and then you figure out if it's worth it based on your own risk tolerance, time horizon and overall goals in this market.

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Tags: $IBM $SPY