Tuesday, May 31, 2005


I'd like to take a look at IBM and offer a guess about its likely trend for the next six months.

In 1993 IBM dropped to a low of 10.16 (adjusted for splits) and there ended a bear market drop of more than 75% from its top in 1987. From its 1993 low IBM rallied to a high of 139.19 in 1999 and then dropped 61% to a low in 2002 of 54.01.

After a price drop of more than 50% from a high the first thing I do is take a look at the market's historical range and divide it into halves, quarters and thirds. The price levels which mark these divisions will generally prove to be support and resistance levels as long as the market stays in that range. One also can often observe symmetries in the market's price behavior relative to these divisions that have predictive value.

In the case of IBM I shall analyze the 129.03 point range that is delimited by the 10.16 low and the 139.19 high. On the monthly chart above this post I have drawn in the divisions of this range in blue and the price boxes for the bull market that began in 2002 in red.

Let's start the analysis at the 54.01 low in 2002. Notice first that the 54 low occurred close to the 1/3 level (53.17) of the range. One symmetry rule I find useful is that drops which stop at the 1/3 level are often followed by advances to the 2/3 level (96.18). I next note that there were two big rallies in the bear market from 139 to 54. The first carried IBM up 45 points and the second 46 points. A rally of 45 points from 54 would end at 99, not far above the 2/3 level. Finally the first bull market box on the monthly chart had its top at 89.46 and its low at 73.17. The 1/2 point of the second box would then be at 97.06 and is typically a strong resistance level. So a conservative guess for a target for the second leg up which started from 73.17 in March 2003 would be the 96.18 to 99 range. In the event IBM rallied as high as 100.43 in February 2004.

In April of 2005 IBM dropped to a low of 71.85. Now I am still bullish on the stock market averages and believe that they will advance substantially during the next 6 months. IBM is a prominent and widely held stock and I think it unlikely that it will drop while the broader market is advancing. I next note that the 71.85 low is near the 1/2 point (74.68) of IBM's historical range and is also the next step up from the support level at the 1/3 point which marked the 2002 low. So I conclude that IBM will now head higher with the market and the question is how high.

Well, markets typically trace out what I like to think of as "staircase patterns" relative to support and resistance levels. This means that the market typically takes two or three steps in the longer term trend direction and then reacts a step or two against this trend. This is a bull market so IBM should be climbing a staircase. It rallied two steps (past the 1/2 level and stopping at the 2/3 level) from the 54 low and then reacted one step back to the 1/2level. On this basis we would expect the rally from 71.85 to carry the market up two steps: past the 2/3 level and stopping at the 3/4level at 106.93.

Two other calculations suggest a top near 106. First note that 108 is a 100% advance from the 54 low. Second note that 107.78 is a 50% advance from the 71.85 low.

All things considered I think that 106 is a reasonable target for the uptrend in IBM which I believe began from 71.85.

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