$CSCO Island Top + Trend Line Break – Next Stop: $19

Just recently, after its earnings, Cisco (CSCO) broke out of its rising wedge pattern with a break-away gap. In the process, CSCO also formed an Island Top which is considered as a very strong bearish pattern. CSCO is currently sitting on the 50% retracement line of its Bullish Channel. There are two price levels that I’m looking at:

1. $19, which happens to be CSCO’s primary trend line. CSCO could find some serious buying support at this price level. But if the overall market starts selling off, then I believe a break of $19 will disastrous for CSCO.

CSCO - $19 Price Target
CSCO – $19 Price Target

CSCO is currently trading at 20.84. That’s a 9% move to the downside (from 20.84 to 19).

2. The second price level I’m looking at is $16. This is the estimated/measured price target that we get by measuring the distance between the High and Low of the rising wedge that CSCO had been trading in since 11/12/2012.

CSCO - $16 Price Target
CSCO – $16 Price Target

If CSCO were to go down to 16, that would be a move of 23% to the downside (from 20.84 to 16). Not bad, eh?

A stop-loss at 21.20 should give you a reasonable risk-reward. If you really want to leverage this move, I recommend buying Jul’ 13 $21 puts on CSCO which are currently selling for 1.25.

Sentiment: BEARISH

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