Testing, testing, 1-2-3
08/15/18

Don’t look now, but the year’s bottom-feeding sector, telecom services, has been swimming toward the surface.

We’re not necessarily talking tech-sector returns, here—although some individual telecom names are high-tech businesses and high-momentum stocks, with the gains to prove it—but rather a slow, steady climb out of the cellar.

Traders could be forgiven for not attaching much significance to this shift. After all, telecom is a traditionally “defensive” sector, and is dead last among S&P 500 sectors for the year—around -8% in the hole. But it’s crept up to the seven spot (out of 11) for the most recent three months (+4.6%), number three over the past month (+2.7%), and…wait for it…numero uno over the past five days (+0.8%).

EchoStar (SATS), 12/28/17–8/14/18. EchoStar (SATS) daily price chart. Two tests of support.

Source: OptionsHouse

Until fairly recently, satellite company EchoStar (SATS) hadn’t been participating in the sector’s resurgence. The daily chart above shows that after approaching its record high ($62.50) from June 2017, the stock sold off around $19 to $43.33 early last month. After a brief bounce, SATS sold off again—effectively, testing the early July low—and then jumped sharply higher on August 6-7 (strong earnings) before consolidating right at the level of the July swing high. (The stock rallied more than 2% yesterday, close to the top of the consolidation, around $49.)

Aside from the successful test of the July swing low (which some chart traders may view as the beginning of a potential “double-bottom” reversal pattern), the 2018 downtrend bottomed at a notable longer-term level: a roughly 61.8% retracement of the January 2016–June 2017 rally (weekly chart, below). Like the 50% retracement level noted in “Ready Trader One,” 61.8% is a widely watched Fibonacci retracement percentage—a level some traders monitor in anticipation of a bounce or reversal.

EchoStar (SATS), 9/28/15–8/14/18. EchoStar (SATS). Bounced near 61.8% retracement.

Source: OptionsHouse

A little background: Fibonacci retracement levels are ratios derived from the Fibonacci series, which is the list of numbers that begins with 0, 1, 2, 3, 5, 8… where every successive number is the sum of the two preceding numbers (1+2=3, 2+3=5, and so on). One of the distinguishing characteristics of the series is that, as it progresses, the ratio of any number and the number after it approaches 0.618 (61.8%), a ratio that is found in many natural phenomena, such as the growth pattern of flower petals and tree branches, as well as in architecture (e.g., the dimensions of the Parthenon). Some traders look for price trends and retracements to coincide with Fibonacci ratios.

Aside from this aspect of the price action, SATS appears to have passed a couple of classic technical “tests”:

●It bounced off the early July low to form the second low of a potential double-bottom (also doing so at a popular retracement level).

●It rallied above the swing high separating the two lows, then pulled back (during the consolidation) to test that swing high.

Sector rotation can turn today’s leaders into tomorrow’s laggards on a dime, but traders may be watching to see if a stock like SATS can build on its short-term bullish momentum (breakout traders will likely be eyeing the stock) enough to benefit from longer-term sector tail winds.

Side note: In late September a new S&P “Communications Services” sector, which will consist of the existing telecom services stocks plus a new media sub-sector (including Facebook, Amazon, Netflix, and Alphabet, Twitter, among others), will replace the existing telecom services sector.1

Market Mover Updates: After pulling back to a two-day intraday low on Monday, Macy’s (M) rallied to close in the green, and then jumped more than 4% yesterday to a new record high in the run-up to today’s earning release.

On Monday, December gold futures (GCZ18) broke out of the bottom of recent consolidation and fell below the $1,200 level for the first time since January 2017. Yesterday the market rebounded slightly, but failed to rally into the upper half of Monday’s range, and closed near the bottom of Tuesday’s range.

 

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1 Reuters. Facebook, Alphabet shifted in sector classification system. 1/11/18.