Broadly speaking, the telecom sector has been an outperformer in 2015. While the big market averages are down 3.6% year-to-date as I write, the telecommunications services sector is up almost 3% over that same stretch. A lot of that outperformance has to do with telcos' tendency to skew defensive, with stable revenue streams and big dividend payouts.
But telcos aren't just looking defensive here – a handful look primed for breakout gains this month. To get on the right side of the trade, we're turning to the charts for a closer look at five technical setups from the sector.
In case you're unfamiliar with technical analysis, here's the executive summary: 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.
Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.
Up first is $32 billion mobile carrier T-Mobile US (TMUS) - Get T-Mobile US, Inc. Report . T-Mobile has been one of the best performers in the telecom sector in 2015, rallying more than 48% since the start of the year. But don't worry if you've missed the upside in this stock so far; shares look likely to kick off a second leg higher in the final stretch of the year.
T-Mobile is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $42 and uptrending support to the downside. T-Mobile has been bouncing in between those levels since the start of the summer -- and all along, it's been getting squeezed closer and closer to a breakout above our $42 price ceiling. When that $42 level gets taken out, it's time to be a buyer.
Relative Strength (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in T-Mobile right now. That's because relative strength is holding its uptrend from the start of the year, indicating that this stock is still outperforming the rest of the market long-term.
As long as that uptrend in our side-indicator stays intact, T-Mobile should keep on outperforming the rest of the market.
We're seeing a similar setup in shares of bigger rival Verizon (VZ) - Get Verizon Communications Inc. Report right now, albeit with a twist. Verizon hasn't matched T-Mobile's rally in 2015, instead shedding about 10% of its market value since the first week of May. But in the near-term, an ascending triangle setup points to a possible reversal in Verizon if shares can take out resistance up at $46.
Why all of that significance at that $46 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in Verizon, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Verizon's shares.
The $46 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $46 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Even though the price setup in Verizon isn't exactly textbook (it's showing up at the bottom of a downtrend, rather than the top of an uptrend), the trading implications are just the same as T-Mobile if buyers can shove this stock above $46.
We're seeing a different sort of triangle pattern in shares of small-cap Virginia-based telco Shenandoah Telecommunications (SHEN) - Get Shenandoah Telecommunications Company Report . Shenandoah is another communications stock that's been in rally-mode in 2015, climbing more than 25% higher since the calendar flipped to January. And this stock is showing a prominent continuation pattern in September, which spells higher gains ahead.
Shenandoah is currently forming a symmetrical triangle, or "coil," pattern, a continuation setup that's formed by a pair of converging trend lines. Consolidation patterns such as the symmetrical triangle are common after big moves. They give investors a chance to catch their breath and figure out their next step. The buy signal comes on a breakout to the top side of the pattern, currently right at the $41 level. If shares can catch a bid above $41, then Shenandoah is likely to see some new highs.
The constricting action of Shenandoah's symmetrical triangle is also setting shares up for a volatility squeeze. Since volatility is cyclical, periods of very low volatility are typically followed up by a swing to high volatility. That means that Shenandoah Telecommunications' initial move is likely to be very fast. Don’t miss it.
Moving across the pond brings us to $6.4 billion Italian communications firm Telecom Italia (TI.A) . Despite macro pressure from Europe, Telecom Italia has actually been moving higher all year long, bouncing its way higher going all the way back to the start of the year. Now that we're halfway into September, Telecom Italia remains a "buy-the-dips stock." The good news is that you don't need to be an expert trader to figure out why.
Instead, this price setup is about as simple as they get.
Telecom Italia has been bouncing its way higher in an well-defined uptrending channel since mid-January, catching a bid on every test of trend line support. From here, the high-probability trade is to buy the next bounce off of support. Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, and you know you're wrong).
Remember, all trend lines do eventually break, but by actually waiting for this bounce to happen first, you're ensuring Telecom Italia can actually still catch a bid along that line before you put your money on shares.
Don't get thrown off by the abundance of gaps on Telecom Italia's chart right now. Those gaps, called suspension gaps, are caused by overnight trading on Milan's Borsa Italiana market. They can be ignored for trading purposes.
Not every telco stock looks strong right now -- and China Unicom (CHU) - Get China Unicom (Hong Kong) Limited Sponsored ADR Report is the one you want to avoid. China Unicom has been hammered lower by the selloff in Chinese equities in recent months, dropping by about a third of its market value as capital has fled Chinese stocks. But shares could have even further to fall in the weeks ahead.
That's because China Unicom is currently forming a descending triangle pattern, the bearish inverse of the price setups we saw in both T-Mobile and Verizon. The sell signal comes on a violation of this stock's support range, which starts at $13 and moves down to $12.50. Even though this stock has rebounded off of its early-September lows, resistance remains intact and it's a mistake to try and "buy the dip" in China Unicom.
Even though China Unicom's setup looks pretty ugly right now, lower levels aren't totally a foregone conclusion -- at least not yet. If shares can muster the strength to break out above resistance, then the bearish price setup is invalidated.
For longs waiting to pounce, a breakout above the 50-day moving average is the signal to wait for. That level has been acting like a good proxy for resistance lately.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.