Upside For Telstra

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

Bottom Line 14/07/15

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $6.02 – $5.95 / $5.79 – $5.75
Resistance Levels: $6.42 / $6.73

Technical Discussion

Telstra Corporation ((TLS)) is a telecommunications and information services company providing services for domestic and international customers. It is Australia’s most prominent telecommunications company with brand recognition across all segments of the industry.  On 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. In July 2014, Telstra acquired an undisclosed minority stake in Telesign Corp. For the six months ending the 31st of December 2014 revenues increased 1% to A$12.72B. Net income before extraordinary items increased 7% to A$2.07B.  The dividend yield is currently 4.7%.  Broker/Analyst consensus is “Hold”.

Reasons to retain a bullish stance:
? New investment in the mobile network should reap benefits.
? Strong first half results presented with mobiles being a big contributor.
? Earnings growth is anticipated with potential to see dividend increases as well as capital management.
? In a low interest environment TLS is an alternative to the banks.
? Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.

In the U.S the 200 day moving average is used by most analysts and investors which in many ways is a self-fulfilling prophecy; generally speaking when it is tagged and rejected the door suddenly opens for strength to kick back into gear.  On the flip side, when price breaks down through the moving average the alarm bells start to ring.  Over here in Australia it isn’t anywhere near as significant although TLS is one of the exceptions.  Since August 2011 the trend line has been tagged and rejected on many occasions which is exactly what transpired a couple of weeks ago. 

During our last review though we were also keeping close tabs on a falling channel which was proving to be equally important.  The upper boundary of the channel has now been penetrated which opens the door for price to head back up toward recovery highs around $6.70.  Whether blue sky territory can be attained we’ll just have to wait and see though there’s no doubting the strength of the prior trend which has been maintained for several years.  As such there is no reason to try and fight it, at least not until the aforementioned 200 day moving average is penetrated.  Adding weight to the immediate bullish case is Type-B bullish divergence on the weekly time frame (not shown).  This variant of divergence isn’t as powerful as Type-A though it should provide a helping hand nonetheless.  As it’s on the larger time frame it is going to take several weeks for our oscillator to head back into the overbought position and until that occurs downside should be limited.

Trading Strategy

Whilst we don’t tend to use the 200 day moving average as an entry/exit mechanism it can be a useful tool to add to the toolbox on occasions.  If you like the company there is no reason why you can’t dip your toes in around current levels whilst keeping the trailing stop just beneath the 200 day M.A.  As suggested above there is a strong case for price heading back up toward recovery highs around $6.70, even within a larger corrective pattern higher which would be our minimum expectation.  Any weakness should be reasonably short-lived which is partly due to the attractiveness of the dividend yield which is still hovering around 5%.
 

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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