International Business Machines (IBM) shares dropped almost 5% after providing initial profit guidance for 2016. The company expects weak demand for its traditional hardware, software and information technology business. Operating profit was forecasted at $13.50 a share, much lower than the analyst expectation of $15.00. The company also reported fourth quarter earnings, which also highlighted a negative trend. Despite coming in-line with analyst expectations, earnings dropped 17% a share to $4.84 and revenue dropped for a 15th quarter in a row to $22.1 billion.
Price action on the IBM daily chart shows the after-hours drop may have formed a bullish ABCD pattern and respected the trendline from the end of August low. Point D is targeted with the 161.8% Fibonacci expansion level of the B to C leg. If this reversal pattern provides a significant bounce, initial resistance may come from the $127.50 level. It is around that area that the bearish trend could return and target the psychological $120 handle. If price is able to break below the psychological $120 level, we could see further pressure target the $112.50 area.
If the current slide is short-lived, initial resistance will come from the 50-day SMA, which currently trades at $136.30 resistance level.
The Trade: Sell IBM at $127.50, with a stop loss at $130.50 and a take profit at $121.50. The Risk/Reward Ratio is 1:2