IBM: The Last Time This Happened, the Stock Rallied 35%

Key Points

• IBM’s shares are down 15% over the past month despite a strong Q2 report. 
• The stock’s RSI has just hit extreme oversold territory, a signal that has preceded sharp rallies in the past.
• Ongoing consolidation around the $250 level suggests bearish momentum may be fading. 

Tech giant International Business Machines Corp NYSE: IBM is back on our radars after a bruising few weeks. Having traded as high as $295 earlier this summer, shares are now hovering just above the $250 level. That marks about a 15% drop from July’s peak and effectively wipes out a good chunk of the hard-won 35% rally that began back in April.

While the pullback has unnerved some, it’s also sparked interest from patient investors watching from the sidelines. As we’ll see below, IBM’s sell-off looks less like a company in trouble, and more like an investor overreaction to a few wobbles in what was otherwise a strong quarterly report.

For some, it might be starting to feel like déjà vu. Because of the recent sell-off, IBM’s technical setup is screaming oversold. In fact, the last time it was oversold, it was followed by a sharp upside reversal. With the stock already starting to consolidate, it may be time for investors on the sidelines to think about getting involved.

Let’s jump in and take a closer look.  

A Strong Report Overall

While shares had been starting to soften in the weeks beforehand, the bulk of the recent sell-off was triggered by the company’s Q2 earnings, released in the final week of July. On the surface, the report was a success: revenue grew nearly 8% year over year, headline numbers beat expectations, margins expanded, and management raised full-year guidance. 

Digging deeper, IBM’s leadership was quick to highlight what’s driving that momentum. Like many of the mega-caps out there, the company is seeing accelerating traction in its generative AI business, now worth more than $7.5 billion, and continues to benefit from its domain expertise and deep innovation pipeline.

Its AI-focused strategy is clearly resonating with clients across sectors, helping to drive strong results like those investors saw last month. Investors hope they can keep seeing these results in the months ahead. 

Yet despite the strong print, a softer-than-expected performance in IBM’s software segment sparked some concern. That division is widely seen as a key lever in IBM’s long-term growth strategy, and the shortfall was enough to flip sentiment against the stock almost immediately; IBM shares gapped down the next day and have only drifted lower since.

Oversold and Setting Up for a Rebound

While the bulls' lack of dip-buying may make it sound quite bleak, IBM’s technicals suggest the selling could be nearing exhaustion. The stock’s relative strength index (RSI) has sunk to around 27, a reading that puts it firmly into extremely oversold territory.

What’s especially interesting is that IBM’s RSI last hit these levels in October of last year. Back then, shares bottomed out almost perfectly before beginning a multi-month rally that delivered gains of more than 30%. 

And right now, IBM has possibly begun to find support around a key psychological level, with shares consolidating above $250 for several sessions.

That’s because, logging weeks of weakness up to now, the bears haven’t been able to push shares below last Friday’s low. That suggests the downside momentum may be fading, and if $250 continues to hold through early next week, the stage could be set for a rebound.

What Wall Street Is Saying

Many analysts, like the team at Bank of America, remain firmly in the bull camp. Following the Q2 report, they reiterated their Buy rating and gave the stock a fresh price target of $310.

From current levels, that implies a targeted upside of about 25%,  a move that would closely mirror the rally IBM posted after last year’s oversold signal from the RSI.

With improved cash flow, clear progress on AI monetization, and strong execution across most business units, the argument for a rebound is compelling. And while software concerns may linger in the short term, it’s likely that much of the worst-case scenario has already been priced in.

Investors should expect this level to hold into next week and be ready to take advantage of what is increasingly looking like a great dip-buying opportunity.