This post formed the basis of an article which then appeared in the Australian Financial Review on 10 August 2016. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE.
This week will be a busy one with major companies reporting their full year results. Those that can do well will be rewarded by the market, yet those who miss expectations will be punished. Two weeks ago we looked at the vulnerabilities of the REA chart leading into their result. We highlighted the risk of the stock falling from the mid $60’s to the mid $50’s. At time of writing, that is precisely where REA has plummeted to today. Another major stock that will be closely watched is Telstra, as it is due to report on Thursday. The Telstra chart also looks quite interesting here and I have identified some key levels worth keeping an eye on.
There is a branch of technical analysis known as Elliott Wave. This states that a stock could move in 3 waves or 5 waves. Since the peak in 2015, we can see that Telstra pulled back for a few months, before bouncing again. Ultimately it then fell suddenly towards a low in March this year. These 3 movements make it obvious that Telstra has, for now, fallen in 3 waves. That may not be the low for Telstra though. If it is going to fall in 5 waves, then this means that Telstra can ultimately make another move to under $5. How do we know if it is going to be 3 or 5 waves and therefore have we seen the low or not? The key is that $6 level. If Telstra can move above $6, then according to Elliott Wave theory, we know that it will not fall in 5 waves and therefore a low is in place. This would imply that Telstra will move higher for the rest of the year. If it fails to breach $6, then Telstra is going to make its fifth and final move down to a low under $5.
So what is the bottom line with this wave analysis? This $6 level is crucial for what Telstra’s share price does in the next several months. If it reports well and goes above it, then expect it to trend higher for the year. If their full year results are underwhelming, and the stock is falling short of $6, then expect to see a “4” in front of the share price by the end of the year. For the moment, my advice is to wait for those results on Thursday and buy or sell accordingly.
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