Telstra Poised For Upside

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

Bottom Line 23/07/14

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $5.16 / $4.96 – $4.92
Resistance Levels: $5.70

Technical Discussion

Telstra ((TLS)) is Australia's most prominent telecommunications company with brand recognition across all segments of the industry. 1H results showed continued momentum in mobile and fixed broadband revenue. The company also remains the best positioned telco for the upcoming NBN review process. Effective January 21st 2014 it acquired O2 Networks, a developer of data networking and network security software. In May 2014 the Company completed the sale of its Hong Kong based mobiles business CSL to HKT Limited.  The dividend yield is currently 5.2%.

Reasons to retain a bullish stance:
→ Telstra continues to gain market share across mobile and fixed broadband as voice revenue declines.
→ Completion of the CSL sale which will free up $4b in cash that can be deployed for various projects, including acquisitions and a possible Buy-Back.
→ Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.
→ Technically, the recent broad consolidation has the potential to be a foundation for a continuation of the longer term trend higher.

Despite being overbought on the daily, weekly and monthly time frames TLS continues to defy gravity as it pushes onwards and upwards.  Ideally we wanted to see a few days of weakness before price pushed higher though not to be.  Buyers have been eager to jump aboard during any retracements which as can be seen ranges between 7.1 % – 4.5%.  Diagonal resistance has now been overcome, albeit by a small margin which keeps the door open for further advances.  However, price is still sitting within a solid multi-year zone of resistance with the upper boundary sitting at $5.70.  This means there are still headwinds to overcome though this doesn’t detract from the fact that the trend since late 2010 has been exceptionally strong.  There are no indications at this juncture that a deeper retracement is going to unfold any time soon.  As long as the dividend yield remains attractive any dips should be well supported.  Indeed, whilst we remain in a low interest rate environment investors are going to continue to view Telstra in a positive light.  The only slight negative is bearish divergence evident on the monthly chart (not shown).  However, it’s by no means a textbook example with our indicator sitting in the oversold position since late 2011.  This just reiterates why we don’t use momentum indicators for buy/sell signals.  Without divergence stocks can remain both overbought and oversold for prolonged periods of time which of course is exactly the situation here.

Trading Strategy

The short-term dip down to the 200 day moving average failed to eventuate meaning we are still sitting on the sidelines here.  Not ideal, but with price recently pushing up through diagonal resistance another opportunity could present itself.  Momentum traders could even jump on right here and now with the alternative being to wait for a retest of old resistance/new support which is a common occurrence.  The caveat of course is that the retest doesn’t eventuate with price heading off without us.  One solution is to buy partial positions here and look to top up later down the track.

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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