BALTIMORE (Stockpickr) -- Stocks sold off yesterday, with the big S&P 500 index losing more than 1% by the time the closing bell rang. Most sectors followed suit in the decline. Energy stocks dropped 1.8%, on average. Tech stocks shed 1.28%.
But one group of stocks had an easier go of it: the telcos. And when one sector is standing out over the rest of the pack, it makes sense to take a closer look.
A lot of yesterday's strong showing in the telecom sector had to do with the announcement that Charter Communications (CHTR) would buy larger cable utility Time Warner Cable (TWC); both stocks popped on the news. But some of the most interesting stock setups in the communications business actually have nothing to do with the deal. For a closer look at those potentially profitable trades, we're turning to the charts for some stocks with breakout potential.
Today, we'll look at bullish technical setups in five big telecom and cable companies.
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.
Without further ado, let's take a look at five technical setups worth trading now.
Up first on the list is cable giant Comcast (CMCSA), the spurned former suitor of Time Warner Cable. The TWC deal has everything to do with CMCSA's ability to move 1.24% during Tuesday's session, one of the few mega-cap stocks that ended higher yesterday. (For its part, Comcast is applauding the arrangement, which clears the way for another potential consolidation down the road.)
The thing is, Tuesday's jump could just be the beginning. Comcast looks bullish in the long-term.
Comcast is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this case up at $60), and uptrending support to the downside. Basically, as shares bounce in between those two technically-important price levels, they've been getting squeezed closer to a breakout above our $60 price ceiling. When that happens, it's time to be a buyer in CMCSA.
Momentum, measured by 14-day RSI, adds some extra confidence to the upside trade in Comcast. That's because CMCSA's price momentum has been making higher lows going back to last fall, providing confirmation that buying pressure is building here. If $60 gets taken out, then it's time to join those buyers.
Atlantic Tele-Network (ATNI) may be a whole lot smaller than Comcast (this telecom company has a billion-dollar market capitalization, versus a whopping $147 billion market cap at Comcast), we're seeing the exact same price setup here.
For ATNI, the price level to watch is a long-term ceiling up at $73. If shares can catch a bid above that level, we've got a buy signal.
Why all of that significance at that $73 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in Atlantic Tele-Network, 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 ATNI's stock.
The $73 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 $73 so significant – the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. It's important to be reactionary on this trade; just like with Comcast, don't buy ATNI until buyers are able to shove this stock above resistance.
Philippine Long Distance Telephone
The bullish price setups aren't limited to telcos based here at home – shares of Filipino telecom operator Philippine Long Distance Telephone (PHI) could be pointed higher in the near-term. The good news is that you don't need to be an expert technical trader to figure out what's going on with shares of PHI. Instead, the price action is about as basic as it gets.
PHI has been bouncing its way higher in a well-defined uptrending channel since mid-December, moving higher on every test of trendline support. That channel is formed by a pair of parallel trendlines that identify the high-probability range for shares of PHI to stay within. Put another way, every test of the bottom of the channel has been a low-risk, high-reward opportunity to get into PHI, and as shares test support for a fifth time now, it makes sense to buy the next bounce higher.
It's worth noting that while trendline support has been inviolate going back to December, the top of the channel has been a whole lot less useful for traders. In fact, shares popped above that upper bound for the entire month of February. But ultimately, for long-side investors, trendline support is a much more important level to have PHI obeying right now – shareholders aren't going to be disappointed if PHI moves above the top of the channel again this summer.
You don't have to look far to find a similar setup. Domestic telco giant Verizon Communications (VZ) has been bouncing its way higher in a well-defined uptrend here at home. Just like with PHI, it makes sense to take the Verizon trade on the next bounce off of support.
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 VZ can actually still catch a bid along that line before you put your money on shares.
Relative Strength, (not to be confused with RSI) adds some extra evidence to the upside in Verizon. That's because relative strength has been in an uptrend of its own since shares bottomed last December, which confirms that this stock isn't just moving higher – it's also outperforming the rest of the market long-term. As long as that relative strength uptrend remains intact, expect Verizon to keep beating the rest of the market too.
Last on our list is regional telco Cincinnati Bell (CBB). CBB has had a pretty stellar run so far this year; while the S&P is only up 3.9% in 2015, Cincinnati Bell has actually managed to rally almost three-times as hard, climbing 11.6% since the calendar flipped to January. But zoom out on the chart, and CBB's upside actually looks like the first leg of something bigger…
In the long-term, CBB is currently forming an inverse head and shoulders pattern. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline" level. For CBB, that's $3.70.
The inverse head and shoulders pattern in CBB has been a very long-term setup, and that comes with equally long-term trading implications once shares do muster the strength to shove above $3.70. After that, the 200-day moving average is a logical place to park a protective stop.