Chart Patterns Suggest Telecom Stocks Are Headed Higher

The bounce from the March lows has sent asset prices in many sectors back above their respective 200-day moving averages. This key indicator is required by active traders to signal a long-term move higher, and based on the patterns discussed below, it appears as though one sector that will likely garner the attention of traders over the days and weeks ahead is telecommunications. We'll take a closer look at the charts and try to determine how followers of technical analysis will be looking to position themselves to profit from the move higher.

SPDR S&P Telecom ETF (XTL)

Active traders who are looking to gain exposure to a niche sector often turn to one of the 21 S&P Select Industry Indices. In the case of telecom, most traders will look to the S&P Telecom Select Industry Index, which is what the managers of the SPDR S&P Telecom ETF (XTL) use to track before fees and expenses. As you can see from the chart below, the price of the fund has recently broken above its 200-day moving average and found support near the level on each attempted retracement over the past several weeks.

The upward momentum has also triggered a bullish crossover between the 50-day and 200-day moving average, known as the golden cross, which is a common long-term buy signal that is used by mark the beginning of a long-term uptrend. Based on this pattern, we'd expect bullish traders to enter a position as close to current levels as possible and to protect against a sudden shift in fundamentals by placing stop-loss orders below $67.05.

Inseego Corp. (INSG)

As the top holding of the XTL ETF, Inseego Corp. (INSG) represents one of the relatively underfollowed communication equipment companies in the United States. With a market capitalization of just over $1 billion, the company is still considered to be fairly small.

Based on the pattern shown below, there appears to be plenty of upside potential remaining. The step-like pattern shown on the weekly chart clearly shows that the bulls are in control of the long-term trend. Buy orders and stop-loss orders will most likely be set near one of the dotted trendlines, depending on risk tolerance and investment horizon.

Vonage Holdings Corp. (VG)

As another top holding of the XTL ETF, Vonage Holdings Corp. (VG) is another telecom company that looks well poised to make a move higher over the weeks ahead. As you can see below, the price has bounced off its 200-day moving average, which will likely be used as confirmation by the bulls to reaffirm that the group is well in control of the momentum.

The recent closes near the longer-term resistance near $11 will also likely be closely watched over the days ahead. A move above this level will likely be the catalyst needed to signal the beginning of the next leg higher.

The Bottom Line

Telecom is one of the sectors of the market that tends to be relatively underfollowed due to preferences for others segments such as computer hardware/software, precious metals, and health care. As discussed above, the closes near major levels of support combined with long-term moving average crossovers suggest that this group could just be starting a major long-term move higher.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.