Telstra: Correction Run Its Course?

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

 

 

Bottom Line 20/10/15

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $5.25 – $5.23
Resistance Levels: $6.53 / $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 year ending the 30th of June 2015 revenues increased 3% to A$26.02B. Net income before extraordinary items decreased 6% to A$4.21B. Revenues reveal the Telstra Retail segment increase of 6% to A$17.19B.  The dividend yield is currently 5.8%.  Broker/Analyst consensus is “Hold”.

Reasons to retain a bullish stance longer term:
? 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.

We noted the reluctance to bounce during our last review with a sideways consolidation taking the form of a symmetrical triangle.  It was important that lower boundary wasn’t exceeded although this is exactly what transpired.  The measured move out of the pattern has now been achieved which means once again we are on the lookout for buyers.  Yesterday definitely didn’t contain too many of those with a steep loss and a low close being the end result.  Today was much better although we definitely aren’t going to get overly bullish on one day’s price action.  Having said all this, there are some positives to take away from the chart. 

First of all, it appears that a 5-leg movement has completed from the high of wave-B – which ideally should complete the retracement.  It’s also worth noting that usually wave-iv will form as a consolidation pattern with a triangle being the prime candidate; of course that’s exactly what’s transpired here.  If we are correct in that a larger degree A-B-C correction has terminated then the bounce zone as annotated just above $6.00 should be the next port of call.  However, it’s important that yesterday’s low at $5.27 isn’t overcome.  It’s also quite interesting that the 1.618 projection of wave-A sits at $5.25. A push beneath that level seriously rings the alarm bells.  The positive today was that bullish divergence triggered meaning it should now be providing a tailwind. As a minimum yesterday’s low should remain untouched until our indicator hits overbought levels.

Trading Strategy

One problem that analysts are highlighting is that the ACCC has cut mobile and fixed line access pricing which Telstra acknowledges will hit revenues.  However, management also stated that the effect on earnings should be negligible.  We’ll see.  From a trading point of view a low risk entry is standing out. Buy following a break above today’s high at $5.45. Place the initial stop beneath yesterday’s low at $5.24. The target sits between $6.00 – $6.17.
 

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