Will Key Test Dial Up A Bounce For Telecom Stocks?
Telecom stocks are undergoing an important test of their multi-year spring breakout.
With today’s drubbing in the stock market, there wasn’t a whole lot of good news for investors. One area that did hold up well, however, was the subject of our Chart Of The Day this morning: telecom stocks. This past June, we pointed out the breakout to 9-year highs by the Dow Jones U.S. Telecommunications Index. In doing so, if you recall, the index broke above multiple peaks near the 173 level spanning the last several years. Around the time of our post, the index had just tested the breakout level following its initial pop and it appeared to be a springboard to further gains.
In the post, we mentioned that “If the sector does continue higher, as all conventional indications would suggest, the next potential major resistance may come near the 2007 highs around 196, or about 6% higher.” 2 weeks later, the Telecom index would reach 195 before stalling out. Ideally, telecom bulls would have preferred the sector to consolidate and digest its gains up near the 195 level as it waited for a new leg of advance. In other words, don’t give up too much of the post-breakout gains. Well, investors do not always get what they want.
If you’ve been tracking the progress (or lack thereof) of telecom stocks over the past few months, you know they’ve been among the market’s whipping boys, along with other defensive former leaders. And as of today, the index has now retraced the entirety of its rally and is testing its breakout level once again.
As the basic chart principle goes, former resistance becomes support. And given the years-long former resistance, the supposed support should be quite staunch. Thus, if the Telecom index does what it is supposed to do here, it should bounce, at least temporarily. How high, we have no idea. We’ll monitor the nature of the (potential) bounce and assess from there. On the other hand, should prices immediately fail to hold this level, it would be a sign of a major “failed breakout”. That would be bad news for the telecom sector.
As an aside, the largest stock within the sector is AT&T (ticker, T). It is no surprise then that its chart bears a strong resemblance to the Telecom index. It too made several peaks over the past several years in the same vicinity (around $38.50). After breaking out above that level earlier this year, the stock rallied up to its own 2007 highs near $43, before being repelled. And it too is all the way back down testing the 38.50 breakout level again. The implications surrounding AT&T’s test are the same as with the Telecom index.
With stocks potentially rolling over here in the intermediate-term, attractive longs may be difficult to come by. The telecom sector has already been beaten down and may now offer traders with at least short-term bounce potential, and perhaps more, given its proximity to the level of its major breakout. Keep your eye on that level to see if telecom stocks can dial up a rally…or whether they’re going to phone it in.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
