One of the most profitable signals for traders to recognize is the break of a major downtrend line.
IBM (NYSE: IBM) has been in a major downtrend for the past 16 months but is currently flirting with a breakout at $195. The blue-chip stock reached an intraday peak of $195.95 last week, but fell with the overall market as concerns over a Gaza ground war and a Russian-Ukrainian escalation weighed on the major averages.
In the midst of this anxiety, the company released mixed earnings results. After the close on Thursday, IBM beat second-quarter estimates with earnings per share (EPS) of $4.12, up from $2.91 in the year-ago period. However, the bulls were not happy that earnings growth resulted mainly from cost-cutting initiatives and share buybacks.
While Big Blue didn't blow anyone's socks off with its earnings report, there was some decidedly bullish news earlier in the week.
Last Wednesday, IBM rallied on news of a surprising strategic partnership with former archenemy Apple (Nasdaq: AAPL). The two companies said they'll be working together to launch a suite of enterprise apps for iPhones and iPads, and IBM will be selling Apple devices to its business customers.
The app, called IBM MobileFirst for iOS, will give corporate IT departments the software and services needed to better secure data sent on employees' smartphones and tablets. Due out in the fall, the app suite is expected to boost the fortunes of both tech titans.
Apple is given an open door into the corporate or enterprise market, which IBM dominates. In turn, IBM leverages Apple's mobile and cloud computing prowess to sell data management apps and services. According to Apple, employees at over 98% of Fortune 500 companies use their iPhones or iPads for work, creating a strong underlying demand for business-based security software and tools.
For IBM, this growth opportunity is particularly important. Over the past decade, IBM's revenue has been flat. This is partially due to the fact that enterprise clients are moving away from bulky physical servers into the cloud.
According to Forrester Research, the cloud computing market is projected to swell to $150 billion by 2020, a more than 325% gain from $35 billion in 2011. In part, through the Apple partnership, IBM may be able to reshape itself into a mobile, cloud-based provider, cashing in on this aspect of the industry's growth.
Moving on to the chart, we see that IBM is also at an intriguing crossroads technically.
The downtrend began in March 2013, after shares touched a peak above $215. In the ensuing seven months, IBM declined to the $170 level. It revisited these lows in December and February, forming a potential triple bottom.
Shares recovered and approached the $200 mark by mid-April. They soon pulled back, however, to around $179, an important historical support level for much of 2012.
Over the past several weeks, IBM has rallied and is approaching major resistance marked by the intersection of the major downtrend line, near $195. If the stock can push through resistance, it would be a major technical victory.
The initial target for a breakout sits at $210.30, but the real excitement would begin if IBM is able to complete a long-term base. If it did, the height of the base would be $40.58 ($210.30 minus $169.72). Adding that to the breakout level of $210.30 gives us a target of $250.88.
Risks to Consider: IBM is on the cusp of a major technical breakout. However, the fact that earnings growth is resulting from share buybacks and cost cutting rather than revenue growth puts a damper on the story. Therefore, my trading strategy is to watch the stock very carefully and let the market decide. IBM should only be bought on a close above $195, which I think would signal a big rally.
Action to Take -->
-- Buy IBM on a daily close above $195
-- Set stop-loss at $178.89, slightly below the June pullback level
-- Set price target at $249.95 for a potential 28% gain by late 2014
This article originally appeared at ProfitableTrading.com:
This Blue Chip is on the Cusp of a Major Technical Breakout