Originally published by Crush the Market
Telstra Corporation Ltd. (AX:TLS) is Australia's largest listed telco and has been a favorite stock to own among retail investors due to its high dividends. However its popularity has been tested over the last 12 months as the share price has gone from bad to terrible, falling from a high of $5.85 as recently as July last year to new multi year low of $4.00.
Up until October 2015 Telstra's share price had been enjoying a multi year bullish uptrend rally. However after breaking its long term uptrend In October & November 2015, the share price experienced a steady decline lower over the last 18 months.
Why Has Telstra Recently Crashed?
Telstra has a number of challenges that it faces over the next few years as a number of earnings drivers will be drying up quite dramatically over the next 3 - 5 years. This is leading to Telstra having to find new earnings growth drivers to replace existing declining earnings streams. So far though the market is not convinced as the share price is in a long term downtrend (See article below on losing earnings drivers)
Click article for source: afr.com.au (Subscription required)In addition to the medium to long term challenges faced by Telstra, TPG Telecom Ltd (AX:TPM) announced last week that it is buying mobile spectrum and will begin to builds its own mobile network instead of being a re seller. (See announcement below)
This announcement which was released on the 12th of April spooked Telstra investors as they dumped the stock on the day, followed with more selling over the next few trading days falling to a new multi year low of $4.00 a share.
With a few trading days left in the month of April Telstra is set to break a key long term support level of $4.50 which could lead to even lower prices over the medium to long term.
Click article for source: abc.net.au Telstra Chart Review
Monthly Chart
Telstra's monthly chart is not providing much positive news for its shareholders as the monthly chart is set to break another key long term support level of $4.50. (As shown on the chart with the 2 circled areas) If this is to occur the most likely direction over the medium term is towards its next support level of $3.85.
Momentum Indicators Confirm Bearish View
The monthly chart momentum indicator has been in the negative since late 2015 when the share price closed below its long term uptrend. Currently its heading lower again after making an attempt over the last 12 months to move back into the positive. The Slow stochastic shows a similar pattern as it struggles to swing higher.
Volume has also been above average so far this month with the significant falls experienced in April, which is also another bearish sign for the stock, that investors have been aggressive in dumping the stock.
Currently the price has recently popped higher after reaching $4.00 last week, as it closed on Monday at $4.21, which may indicate some short term relief for the stock after significant falls.
Weekly Chart
The weekly chart provides some positive news for shareholders despite its bearish similarities to the monthly chart.
Similar to the monthly chart the weekly support level of $4.50 was clearly breached recently which is not a positive for the stock over the medium term. However after reaching within days its next support level of $4.00 a share, it appears to have respected the $4.00 support level for now.
Last week's candle showing a long tail pointing down also indicates buyers stepping in to bid the prices highers giving some temporary relief to shareholders after falling sharply from the $4.50 levels.
Although momentum indicators are strongly in the negative supporting the bearish outlook on the weekly chart, it appears that the indicators are about to swing higher which could see the price move towards its previous support level of $4.50 over the coming weeks. However we would need confirmation of the weekly momentum indicators turning higher to support this.
If the $4.00 support level fails to hold over the next couple of weeks the next level of support is $3.75. Given that the yield on the stock is quite high now with the recent price falls and we are coming up to earnings season in July August, its unlikely that we will see the stock fall below the $3.75 support level without an earnings and or dividend downgrade in the next few months.
Daily Chart
The daily chart of Telstra has been a classic downtrend cycle for some time, with the stock reaching the extreme points of the trend on several occasions as indicated on the chart below. Given that the share price had recently fell below the trend line on the downside briefly and recovered back within its down trend indicates that the stock may be oversold and is due for a short term recovery and possibly back to $4.50 resistance.
A close above $4.50 could see the stock move towards $4.75 which is possible if investors decide to take advantage of the dividend in the coming months.
The slow stochastic on the daily chart has swung higher as it reflects the recent bounce after touching $4.00 a share. Momentum is still negative at -0.46 so caution is warranted still, especially since the stock is in a clear down trend momentum with plenty of negative sentiment surrounding the stock.
Overall the stock's bearish indicators and long term downtrend warrant the title of going from bad to terrible. For any new investors who have taken advantage of the new lower prices may find the current dividend yields higher enough to warrant the potential risks. However existing shareholder may not share the same sentiment consider they are nursing considerable losses in the share price over the last 6 - 12 months.
Given the medium term outlook for fundamentals from a loss of earnings from some divisions of the next few years together, as well as increased competition from TPG Telecom and a long term downtrend, it appears that the stock will continue to disappoint.
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