Last week, Warren Buffett once again shook up the investment world when investors discovered a hefty stake in technology giant International Business Machines among his holdings. The “Oracle of Omaha” took an $11 billion stake in this leading technology company. More importantly, it was in a sector the famed investor had steadfastly avoided.
On November 14, the day of the announcement, shares of IBM jumped 1.3% at the opening bell but eased to a three cent loss by the close. Apparently, this new development did not make a lasting impression on the market.
On the charts, the initial move was an unconfirmed bullish breakout from a four-week trading range called a triangle. This pattern gets its name simply from the shape it traces out on the charts with rising bottoms and falling tops. Typically, this type of pattern suggests a continuation of the trend currently in force and for IBM that would have been up.
Although the bulls made two more attempts to push the stock back to new highs, they could not, leaving IBM below a price ceiling of roughly 190.
I called it an unconfirmed breakout because the stock still had to clear resistance from the October high. And now that prices have eased back down into the triangle’s borders, the pattern itself is no longer valid.
Investors must now look with a slightly more bearish eye. What seems to be the line in the sand is the rising trendline from the September low, currently near 184, and the widely followed 50-day moving average, currently near 180 (IBM closed Friday at 185.24). If prices drop below these two features on the chart then perhaps a deeper correction is in the cards. Chartists are watching the 170 level where the 200-day average and the trendline from mid-2008 converge.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Sign up for his free, no-spam technical analysis chart of the day at www.QuickTakesPro.com