Peering Closer at Two Telecoms

 | Oct 08, 2013 | 8:30 AM EDT  | Comments
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On a screen full of red, one of the few bright spots in Monday's trade were the telecoms. AT&T (T) and Verizon (VZ) took the top two spots on the Dow Jones Industrial Average for much of the day -- and, in the end, AT&T closed Monday up 0.7%, while Verizon finished up 0.4%.

These two stocks have both been in steady corrective modes since they peaked in mid-to-late April. Given the age-old mantra to "buy the pullback," is now the time to give these two telecoms another look?

Before we get into the technical side of things, let's first take a look at the recent news. AT&T and Verizon can both thank Apple (AAPL) for a share of their good fortune Monday. The spike in Apple's iPhones 5S and 5C has spilled over into these popular service providers. AT&T also announced that it will soon be the exclusive provider of a new gadget dubbed FiLIP, which is essentially a high-tech way to keep track on your children via the form of a colorful smart watch.

But, all hype aside, what do the charts tell us?

Both stocks have had a traditional "two-wave" correction on the weekly time frame. This consists of two primary waves of downside correction into price support. A substantial number of two-wave corrections will result in a continuation of the prior uptrend. Still, as much as I would love to find some outstanding new long-side opportunities in the major indices right now, I fear these two stocks will both be facing some strong headwinds.

Let's begin with AT&T. The stock faced a major setback as it kicked off the new millennium. Sharp selling dramatically sliced share prices before the stock finally found support in late 2002 and early 2003. Its recovery really took off in 2006, but that was short-lived -- the price peaked again in 2007 and fell short of a full recovery. This marked the first move higher on the monthly time frame since shares bottomed.

The stock fell sharply once again in 2007 and into 2008, retesting the prior lows, and the second recovery attempt has been under way since late 2008 to early 2009. This second recovery, however, has been more gradual than the first -- and it now faces exhaustion of its own.

AT&T (T) -- Monthly

Source: TradeStation

While the stock has had two recoveries off lows, leaving it at risk of giving way to another monthly selloff, the smaller-time-frame AT&T charts show that it has pulled back twice off the highs of this second recovery run. It's now at the lower end of this trading channel on the weekly time frame, so it has strong support.

AT&T (T) -- Daily

Source: TradeStation

What the AT&T bulls lack, however, is a decent change in the momentum of the second selloff as the stock strikes that support. This is most evident on the daily time frame. The September bounce retraced quickly, and while momentum has shifted intraday to allow for the bulls to regain control today, a glance back to late 2012 shows that this struggle might only be just beginning.

Verizon (VZ) -- Daily

Source: TradeStation

Verizon stock has been stronger than AT&T over the past several years, but it faces challenges as well. Not only does the stock have the daily momentum working against it, leaving the door open for a retest of the zone of this summer's lows, but it's also facing trend exhaustion on the monthly time frame.

Verizon (VZ) -- Monthly

Source: TradeStation

Verizon has already seen three major rallies since it reversed higher in 2010. It struck major price resistance on this last wave as it approached $55, as shown on the monthly chart. Because it has retraced back to the zone of the prior high in 2012, a rally off the support weekly and monthly support will have a difficult time breaking through those that $55 zone. Instead, what's more likely is a longer correction through time on the monthly charts.

So, while both AT&T and Verizon stand to benefit from the latest technological developments, for now these benefits are more likely to play out only in the short term in the shares. Between the two, Verizon has the best chance for consistent shorter- and longer-term gains. Sometimes greater relative strength can mean the potential for stronger corrections. In this case, however, that relative strength is more likely to work in Verizon's favor.

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