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5 Telecom Stocks Breaking Out Ahead of Earnings - views
BALTIMORE (Stockpickr) -- If you’re looking for an investment with relative strength in this market, look no further than telecoms. No slouch since the start of 2012, the S&P 500 has eked out performance of 8.78% (with dividends factored in) so far this year -- but the S&P Telecommunications Sector Index has managed to do a lot better, churning out 17.8% gains over that same period.
So it shouldn’t come as a surprise then that there are ample breakout opportunities in the telecom sector right now.
Telecoms sport defensive revenue streams and massive dividend payouts right now, giving them a defensive bent at a time when investors are especially anxious about owning stocks. And better still, their year-to-date performance bodes well for telcos for the rest of the year; positive relative strength trends led to positive returns on a three-to-10-month time horizon according to a handful of recent studies.
With sentiment looking crowded on the bearish side of the trade right now, it makes sense to take a technical take at five breakout telecom stocks today.
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For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Here’s a look at five technical telecom sector setups that could deliver breakout gains to your portfolio this week.
AT&T (T) is giving investors a stellar showing in 2012. Since the first trading day of January, this $208 billion communications firm has rallied right in line with the industry as a whole, climbing 17.5%. And now, the setup forming in shares points to additional upside in AT&T.
Here’s everything you need to know to make the trade.
AT&T is currently forming an ascending triangle pattern, a setup that’s formed by a horizontal resistance level to the upside and uptrending support below. Essentially, as shares bounce in between those two technical price levels, they’re getting squeezed closer and closer to a breakout above resistance, in this case at $36. While resistance hasn’t been perfectly horizontal, the higher swing highs at the start of July merely point to buyers having more control right now, a good sign for upside in T.
Support got backed up by volume back in the last week of June, a solid sign for T since we’ve already seen that shares can actively catch a bid on a test of their uptrending support line. I’d be a buyer on the breakout above resistance at $36 -- just keep a tight stop below uptrending support.
AT&T’s earnings call on July 24 could be a big catalyst for shares.
As of the most recently reported quarter, AT&T was one of the top holdings at Ray Dalio's Bridgewater Associates.
BCE (BCE) is showing off a similar pattern right now -- it’s just a little bit further along. The Canadian telco had been forming a long-term ascending triangle pattern, with resistance at $41 and an uptrending support line just above the 200-day moving average. Shares broke out at the start of July, and they’ve been consolidating ever since. That’s why now looks like a good time to pick up shares.
So why does it make sense to buy a breakout in the first place? The best way to think of resistance is that it’s a price level above which there’s a glut of supply of shares (a pocket of selling pressure). Each of the previous attempts where BCE tried to move through $41, those sellers absorbed any buying pressure put on by buyers, reversing the climb. But the breakout above $41 signaled that increasingly eager buyers finally absorbed the excess supply, which means that the big barrier to upside movement no longer exists in BCE. That’s exactly when you want to be a buyer.
Momentum adds some extra evidence for higher ground in BCE: 14-day RSI broke its downtrend just before BCE itself broke out, and the momentum gauge has been in an uptrend ever since. Since momentum is a leading indicator of price, that’s a good sign for buyers.
I’d recommend buying here with a protective stop just below that newfound support level at $41.
Investors got another breakout in CenturyLink (CTL) last week, after the country’s third-largest phone company finally pushed above resistance at $39. Now shares are showing us a “throwback,” a test of newfound support at a stock’s previous resistance level. This week, that’s providing a second chance at a low-risk entry for investors.
CenturyLink had been forming a rectangle, bouncing between horizontal support and resistance as investors psychologically absorbed a 23% rally from October’s lows. For the same reasons as we’ve already covered, the breakout above $39 was a buy signal for shares, the glut of supply of shares at that price finally absorbed by buyers.
It’s actually a positive thing that shares came back down to test that $39 level after the breakout. When a stock throws back to test a breakout level, it’s a good indication that the technical reasons for buying are still holding up.
Statistically, a throwback like CTL is showing us generally rallies less hard than a stock that simply breaks out and runs higher. But a throwback comes with a second chance at a low-risk entry for traders who missed the initial breakout. After all, a breakdown below $39 tells us quickly that we’re wrong about the CTL trade, minimizing maximum downside.
I like CTL for fundamental reasons too; it’s one of 5 Big Stocks You Can Buy Dirt Cheap right now.
Frontier Communications (FTR) is a buy right now because it’s not a sell. I realize that sounds a bit bizarre, but bear with me.
Frontier has been a big outlier in the telecom sector. While the rest of the sector has rallied 17.8% so far in 2012, FTR has actually managed to slide 22.7% over that same period, dramatically underperforming its peers. Frontier’s decline was orderly, though, bounded by a well-defined trend line resistance level acting as a sort of ceiling for share prices. Now, with that trend line resistance level broken, FTR looks like a buying opportunity.
The fact that Frontier broke through resistance tells us that buyers have become more eager to buy at FTR’s current prices than sellers are to sell. That’s presenting a solid buying opportunity.
Momentum is looking strong too. It moved from its bearish range (not climbing above 50) to a bullish range with support at 50 -- yes, RSI can have support and resistance too. I’d recommend buying here with a protective stop at the 50-day moving average, which has acted as a good proxy for trendline resistance since the downtrend started in FTR. If shares break below the 50-day again, we know that this stock’s newfound uptrend has lost its steam and it’s time to walk away.
Watch out for second-quarter earnings on July 31.
For another take on Frontier, it shows up on a recent list of 6 Sucker Stocks to Avoid at All Costs.
Telecom Corp. of New Zealand
Last up is Telecom Corp. of New Zealand (NZT), a $3.75 billion telco that weighs in as one of the biggest companies in the Kiwi country. Even though NZT’s chart looks a little tougher to interpret than most -- it’s filled with gaps -- there’s a solid technical setup that’s forming in shares.
Here’s how to trade NZT this week.
Right now, NZT is forming an inverse head and shoulders, a bullish setup that indicates exhaustion among sellers. It’s identified by three swing lows -- two at around the same level (the shoulders) that are separated by a deeper one (the head). Don’t let the gaps throw you off with NZT’s chart. They’re suspension gaps that are caused by off-hours trading in NZT that occurs on the Australian and New Zealand stock exchanges, and they don’t carry any technical significance.
The buy signal for NZT comes on a breakout above the neckline at $10. If you decide to take this trade, I’d strongly recommend waiting for the breakout above $10, then put in a protective stop at the 200-day moving average.
To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.