It's ironic, but amid all the market volatility investors are experiencing at the tail end of 2018, a typically volatile stock is looking like a high-probability trade.
Sprint has had an interesting 2018. While the broad market indices continue to swing back and forth, Sprint has actually enjoyed a pretty clearly defined uptrend for most of the year. Since bottoming back at the beginning of April, Sprint has managed to rally 25% higher.
Compare that against a measly 1.88% price return for the S&P 500 over the same time frame.
Back at the end of April, mobile carrier T-Mobile US Inc. (TMUS - Get Report) announced that it had agreed to a stock-for-stock merger that would give the combined firm the scale to compete with larger U.S. carriers. To-date, Wall Street has been skeptical; current pricing implies that investors only see a 30.4% probability of the deal going through.
But that lack of faith in a Sprint/T-Mobile deal is creating a buying opportunity for investors as shares rally higher this winter. As we close in on the mid-2019 anticipated closing date, more analysts are expecting the deal to close smoothly.
To figure out how to play it, we're turning to the charts for a technical look.
Up first, T-Mobile:
T-Mobile's chart matters because it's ultimately what Sprint shareholders will end up owning. You don't need to be an expert trader to figure out that T-Mobile has been in a very well-defined uptrend since mid-May, bouncing higher on every successive test of trendline support.
Not surprisingly, Sprint's price action has been very highly correlated with T-Mobile's since the deal announcement. That, and the fact that there's still a 12.5% discount baked into Sprint's stock price versus the deal price, make Sprint the way to play it:
Sprint's successful test of trendline support this week looks like a solid buying opportunity from a pure technical standpoint. Add in a relative strength line that shows outperformance versus the rest of the broad market, and a discount to Sprint's merger price at current levels, and the weight of the evidence points to a high-probability setup in this stock.
Risk-management is key, particularly in a volatile stock like Sprint. If you decide to buy here, it makes sense to hang on until the merger discount erodes or until Sprint violates its 200-day moving average (a decent proxy for trendline support), whichever comes first.