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What's Up With Cisco?

What the heck is up with Cisco ?

Inquiring minds want to know, because it may well determine the near-term direction of the stock market.

Cisco's stock has been outperforming the Nasdaq since its July 11 low, up almost 20% versus a 5% gain for the Nasdaq. There has been talk that Cisco made its quarter without a need for a strong sales push at the end. Cisco reports earnings after the close Tuesday, August 7. Estimates are for pro forma earnings of 2 cents a share, down 86% from a year ago.

And on Friday, Cisco announced its first acquisition in some time, of privately held VPN firm Allegro Systems. Cisco does not favor making acquisitions when its business is in disarray, so analysts saw the acquisition as another positive sign.

The company isn't saying anything, which some are taking as another good sign, because the company didn't warn. And CEO John Chambers, who spent the first part of the year saying how bad the economy was, has not been heard from in some time. That may be due to the fact that there is no longer a need to bully the Federal Reserve, which has been very accommodating, but it's yet another interesting development at Cisco.

Looking at the chart for clues, however, the signs still look bearish for Cisco. The stock's rally off the April 4 low ended in a head and shoulders top (see chart below), which broke down on June 14. The stock tried to get back above the neckline of that pattern on June 29, but failed. And off the July 11 low, Cisco has been forming a bearish rising wedge or bear pennant, essentially a rally with converging trendlines, meaning the rally will likely run out of room eventually. It would take a strong move above the 20.50-20.75 level to negate those bearish signs. Otherwise, that head and shoulders top predicts a minimum downside move to 13.

At 68 times anticipated July 2002 earnings, which are expected to fall by 30% from this year, the stock would still look pricey at $13. Let's hope John Chambers has good things to say next week. First support is the 50-day moving average at 18.95, and then the 20-day average at 18 (but the fact that the 20-day average is below the 50-day average is another sign of weakness).