Technical Analysis: Telecom stocks have the right mix

Even during a technical bear market, as is currently the case in the S&P 500, Euro Stoxx 50 and Dax, there are a few selected individual titles and sectors that have a technical “life of their own”.

Against all negative factors - such as rising bond yields, high inflation rates or geopolitical challenges such as the Russo-Ukrainian war - these stocks show significant relative strength and in a few cases also an upward movement.

In addition to the energy (formerly: oil & gas) and basic resources (commodity and mining stocks) sectors, which tend to have medium-term overbought structures, the European Stoxx Telecommunication stands out positively in the defensive technical sectors.

From this sector, Deutsche Telekom (medium-term, technical price target: EUR 20.5) is currently a technical (acquisition) purchase.

The Stoxx Europe 600 Telecommunications (in short: Stoxx Telco) includes the leading European telecommunications stocks with suppliers.

With this sector index, a price index that started at 100 points at the end of 1991, the development of the past 30 years can be divided into three simple technical phases.

The first phase in the 1990's was a textbook tech bull market as part of what was then the TMT (Technology, Media and Telecom) bull market.

The index had risen to an all-time high of 1062 points by March 2000.

The second technical phase is a subsequent bear market.

This ran until September 2002 and reached its bear low at around 170 points.

Since then, the third technical phase has been in the form of a sideways movement (support zone from 165 to 170 points; resistance zone around 400 points).

Within this 20-year sideways swing, "normal" medium-term bull and bear movements have alternated.

The last medium-term moderate bear market started in July 2015 at the long-term resistance zone around 400 and ended in the Corona overall bear market in March 2020 in a sell-off at 165 points.

Defensive character prevents steep ascent

Since then, the sector has been on a new medium-term upward trend, although there was initially relative weakness in a European sector comparison.

With the start of the Russo-Ukrainian war, the defensive, technical nature of the sector is coming to the fore and the medium-term relative strength remains intact in the index.

This new medium term up move has led the index into a consolidation below the additional minor resistance around 245 points for the last few months.

So far, this consolidation has had an upward trend-confirming character.

It should come as no surprise if the sector index settles higher towards the next medium-term resistance zone by 262 points in the coming weeks.

Overall, however, the new upward momentum as a reflection of the defensive character should only show moderate upward momentum.

Due to the attractive overall technical situation, the defensive character of the sector and a (gross) annual dividend yield of more than 4 percent, the Stoxx Telco with its "bond replacement character" is currently a technical (acquisition) buy.

The Deutsche Telekom AG share, which is also included in the Euro Stoxx 50 and Dax, is one of the reasons for the currently attractive technical condition of the Stoxx Telco.

Since autumn 2015, the share has moved below the staggered resistance zone of EUR 17.8 to EUR 18.1 in a sideways swing with "normal" medium-term upward and downward trends.

Starting from the price low of 10.4 euros (March 2020; Corona bear market low), the stock establishes a new upward movement, which has expanded into a new, technical boom in the past few months (medium-term uptrend now at 15 euros).

Rise after the fall at the beginning of the war

The shares of Deutsche Telekom, whose American subsidiary T-Mobile is on a good operational path and whose planned share buyback programs and higher dividend payments for the coming years will have the new majority shareholder Deutsche Telekom as the main beneficiary, jumped over the market in late summer 2021 with an investment buy signal Resistance zone from 17.8 euros to 18.1 euros.

However, this attempt to break out of the previous six-year sideways movement has not yet been successful.

At the turn of the year 2021/2022, the overall market weakness of the share initially set in.

This was followed by the price slide due to the outbreak of war in February.

Now the second technical breakout attempt is underway.

With the tailwind of the generally necessary digitization efforts and the expansion of the 5G network and most recently the fantasy due to the planned (partial) sale of the Telekom radio masts, which should create further financial leeway for debt reduction and for investments, the share has gained a second Investment buy signal followed and a multi-year high reached.

The relative strength of Deutsche Telekom compared to the Euro Stoxx 50 and the Dax as well as in the Stoxx Telecommunications shows a high technical quality.

The overall technical picture is pointing to a continuation of the new intact bull trend, with the next medium-term technical milestone likely to be around the EUR 20.5 area.

The Deutsche Telekom share, which currently offers a (gross) dividend yield of 3.4 percent, although the next dividend payment is not due until 2023, represents a defensive technical (acquisition) purchase, especially on weak stock market days.

Each position in this share should be covered with a strategic safety stop at EUR 14.9.

If the stock falls below this price level, the currently attractive overall technical picture is reset to a neutral technical view.

The author is chief strategist at Matzke Research.