Originally published by Crush the Market
On Thursday Telstra Corporation Ltd. (AX:TLS) reported a 12% drop in its half year earnings ending December 2016. This took the market completely by surprise and the stock was savaged by investors as it fell 4.5% for the day on extremely high volume.
Telstra which is the largest market cap telco in Australia is quite popular with retail investors and super funds because of its large dividends paid out annually. The key question going forward is whether investors will still support the stock as it struggles to grow its profits.
Today's chart review of Telstra we look at all 3 time horizons monthly, weekly and daily charts to determine where Telstra could go next.
Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
Stock Review - Telstra (TLS)
Monthly Chart
With just over half the month completed in February it appears that Telstra will close below a key support line of $5 a share. If this is to occur by the end of the month this will be quite bearish for Telstra, as the $5.00 level has previously held up on a monthly chart when the price reached or fell below these levels. Since the stock is trading below the $5 level I have labelled this level of support now as its new resistance level.
Momentum which I have circled in the chart below is currently negative and has been negative for over a year now. This indicates the weakness in the stock since Mid 2015 is confirmed by the momentum indicator as well. The monthly stochastic indicator which is another momentum indicator has also turned bearish again confirming the break of the $5 support level.
If the $5.00 a share support level has been broken and confirmed by the end of February, the next stop for Telstra is $4.50 support on the monthly chart. This new support level is another 34c away from the current price on Friday's intraday price of $4.845.
Telstra Already In Long Term Downtrend Before Profit Announcement
If you take another look at the monthly chart below you will notice that Telstra broke its long term uptrend back in October 2015. Since breaking the uptrend line the stock bounced up and down for the last 18 months, before falling below $5 a share this week.
Weekly Chart
The picture does not improve for Telstra on a weekly chart with the stock failing to move toward the $5.5 downtrend line. Instead because of yesterday's profit announcement the stock has now formed a steeper downtrend line shown along the circle on the chart. If this down trend line holds it would mean that in the short term we could see sharper declines for the stock once the stock has gone ex dividend.
I have circled the weekly stochastic indicator to show that it too has turned down from close to its peak levels. This suggests that the trend has room to move and will continue to decline lower over the medium term.
Moving Average Bearish Cross
Telstra's weekly moving averages formed a bearish cross back in September last year when the 10 week moving average closed below the 50 week moving average. Since this is a weekly chart the moving averages crossing over late last year confirms that Telstra is in a medium to long term down trend phase.
In addition the current price is sitting below both moving averages which is another bearish indicator for the stock.
Just like the monthly chart the next level of support for Telstra on the weekly chart is $4.50. Failure to hold this level would see Telstra move towards $4 a share. Considering Telstra still has a considerable decent dividend attached to the stock, it would be unlikely to see Telstra move below the $4.50 level without a further deterioration in profits and or dividends.
Daily Chart
Gap Downs On Heavy Volume Never A Good Sign
I have circled on the chart below the big gap lower where Telstra opened at yesterday after disappointing the market expectations on profit. The volume reached just over 118 million shares traded yesterday compared to the daily average of 28 million shares. When ever you see a massive increase above average volume like Telstra achieved yesterday coupled with a big gap down, the prospects for the stock in the short to medium term are usually never positive for the price.
Days before the profit announcement you will notice the stock got close to the $5.30 resistance level but failed to reach it. This was bearish indicator for the stock even before the announcement.
Now that the stock fell sharply the daily chart moving averages have formed a bearish cross as the stock's next support level is $4.70 a share.
Similar to the monthly and weekly chart the momentum and Stochastic indicators have confirmed the bearish move lower as they both are signalling overall weakness in momentum.
Conclusion:
After looking at all 3 charts above, there is no positive or bullish indicators for the stock on any of the time horizons. With the most likely direction for the time being to continue to head lower to the next level of support. The only bright spot for the stock outside of the chart is the big dividend that now looks more appealing if the stock can sustain the dividend over time.
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