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Trader's Radar: Putting Cisco's Warnings

Trader's Radar: Putting Cisco's Warnings into Action

Chris Tyler, Optionetics.com
February 24, 2011

A couple weeks back and what might feel like a world removed from our current market reality of oil disruptions, hyperinflation and double dips or derailing of global growth, Cisco Systems (CSCO), the world’s largest computer networking outfit, did its part to warn of looming troubles still ahead with its somber below views outlook.

A second warning might also have been appreciated that day. While the broader market saw fit to dismiss the company’s cautious forecast, trader reaction actually showed a very sympathetic response in shares of CSCO. That day the stock tumbled more than -14% and back below the prior quarter’s similar and well-heeded earnings-related fallout.

Three time loser anyone? Checking out the weekly view of Cisco shown below in Figure 1 and the opinion of this market technician is the stock is facing continued downside pressure. Of particular interest, we can see that over the past couple of years since CSCO staged its own now less fantastic March bottom that the stock has traded rather cleanly with respect to channel lines.

From the infamous March 2009 lows, CSCO first rallied nicely in a tight up-channel until breaching lower support. The stock continued to rally but the action appears to have been an early warning of a top. Despite going higher, CSCO kept to the game of mostly bumping up against the former support line as designated by the yellow oval breakdown and red arrow annotated on the chart.

Figure 1: Cisco (CSCO) Weekly Bear View

Over the past year, another channel has developed. This channel has been looser but also well-organized and also continues to point to lower prices ahead. CSCO shares remain entrenched near the center of the bearish conduit while breaking below a flag consolidation kept in check just below the 62% retracement level. More than a few technicians that follow Fibonacci believe when support at the 62% level fails to hold, the stock in question is bound for a full-fledged retest of lows. And in the case of Cisco, this would amount to a double bottom.

So, what’s a bear to do? Well, if history is any indicator and Cisco moves on to being a three time earnings loser and investors continue to act appreciatively in a bearish sort of way; May or June premium are the months that will be in play. That precludes the potential for a warning, but were that too occur, we suspect bears would be all the more merry. That being said and also depicted on the weekly chart, I like the idea of “X” marking a spot with which to profit as a bear.

Premiums in May and June are slightly expensive on a relative implied basis, but not by a large enough amount worth sweating over. Statistical values suggest mixed pricing with longer-term values well-above current implieds near 30% due to the last two earnings fallouts. Lastly and not to be forgotten, if we let “X” mark a percentage double of premium as a worst case expiration scenario; putting a bearish channel to work with the likes of an ATM June 18 put, and as we've done above, seems to make more sense and possibly cents as well, than not.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site