If This Happens, IBM Stock Could Surge

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International Business Machines Corp. (NYSE:IBM) stock is off to a great start for 2016, up 19.6% year-to-date. This is a nice change compared to the dismal returns experienced over the last three years. Each respective year produced losses. Could this be the beginning of a new trend?

I have reason to believe that IBM stock may have put in a significant bottom in 2016, meaning it is ready to resume its bull market and challenge its all-time high in share price. My reasoning has nothing to do with Berkshire’s purchase of IBM stock or Warren Buffett’s record of picking winners—though this does support my bullish view.

All the evidence I have gathered is from the price chart of IBM stock.

A price chart can help investors determine the attractiveness of an investment simply by looking at certain aspects on the chart action. If we can successfully discern trends and patterns on a stock chart, we can get an idea of where share prices might be headed next.

The following chart illustrates IBM stock’s trend since 2012:

ibm nyse chart

Chart courtesy of www.StockCharts.com

The trend that has dominated IBM stock since 2014 has been to the downside. A downtrend is defined by lower lows and is confirmed by lower highs. On a stock chart, it can easily be identified as the share price moves from the upper left to the lower right of the chart.

The downtrend line (highlighted in blue in the stock chart above) is created by connecting the peaks. This line is the obstacle I am referring to in the headline of this article. If IBM stock can surpass this trend line, it will confirm that the downtrend in IBM stock has ended and a new bull market is on the horizon.

Breaking above that trend line will not be an easy task. It may take several attempts to do so. A break above the trend line would also change the pattern of lower highs, as the share price of IBM stock would be making a higher high.

The following chart illustrates the importance of the lows that IBM stock achieved in early 2016:

ibm nyse chart

Chart courtesy of www.StockCharts.com

Fibonacci retracement numbers (highlighted in green in the chart above) are a very popular tool used by many technical traders. They are used to identify counter-trend price objectives. In theory, when a stock pulls back from a primary trend, shares will retrace 50%–62% of the primary move. This 50%–62% zone usually offers support for the share price, as traders will be eyeing this area to enter long positions or cover short positions.

IBM stock conformed to the Fibonacci retracement numbers perfectly. The blue box in the above chart is what traders refer to as “trading into the box.” Using this technique to purchase shares as the share price entered the box proved to be a winning strategy. If we assume an average cost of $125.00 per share, we would stand with a 29% paper profit.

The Fibonacci numbers further enforce the importance of the price lows IBM stock experienced in 2016. If these prices are indeed the lows, then the odds of breaking above the downtrend line increases exponentially.

The Bottom Line on IBM Stock

IBM stock is on the verge of resuming its bull market that began in 2009. In order to confirm this, IBM stock needs to close above the downtrend line that has dominated this investment since 2013. The lows in its share price experienced in 2016 are supportive of this view. It is only a matter of time until this trend is tested.