AT&T Inc. (T) shares are trading sharply lower on Friday morning after the U.S. Justice Department said that it would appeal the telecom giant's recently completed merger with Time Warner Inc. The news stunned legal experts, who believe that the June ruling is fact based, airtight and unlikely to be overturned. It's now possible that the U.S. Supreme Court will eventually hear the case, with a decision not expected for many months.

The news will affect AT&T's bottom line because Time Warner has already been integrated into the new WarnerMedia LLC and no longer exists as an independent company. That means the company has to bear the full cost and consequences of an adverse decision, including the worst-case scenario in which it is instructed to resurrect the old company and issue new stock. The proceedings will also affect plans to find synergies, integrate operations and seek new acquisitions.

Technically speaking, the government's action couldn't come at a worse time, with AT&T struggling to hold six-year support near $30. Months of litigation and government jawboning have worn down institutional buying interest, encouraging long-term shareholders to head back to the sidelines, with memories of 2011's failed T-Mobile US, Inc. (TMUS) bid still weighing on sentiment. (See also: Mergers to Make AT&T, Comcast Highest-Debt Cos.)

T Long-Term Chart (1985 – 2018)

 

The stock rocketed higher through the 1980s and 1990s, splitting three times during an ascent from $4.58 into the 1999 all-time high at $59.94. It reversed at that level seven months later and spiraled into a steep decline that found support in the mid-$30s, ahead of a recovery wave that reached resistance in October 2000. It turned lower once again, completing the last stage of a massive topping pattern that broke to the downside in 2002.

Selling pressure continued into the first quarter of 2003, dropping the stock to a nine-year low near $20. It turned higher into the middle of the decade but sharply underperformed other blue chips until a 2006 breakout attracted strong buying interest. That rally impulse continued into September 2007 and stalled at the .618 Fibonacci sell-off retracement level in the lower $40s, giving way to a vertical plunge during the 2008 economic collapse. 

The decline ended at a five-year low in the mid-$20s in October 2008, yielding a limp uptick that finally completed a round trip into the 2007 high in June 2016. The stock has posted a series of lower highs and lower lows since that time, reaching the top of horizontal support at the 2012, 2014 and 2015 lows in November 2017. It undercut that low in May 2018 and is now testing the 2015 low, which marks the last line of defense for beaten-down bulls.

The monthly stochastic oscillator dropped to the most extreme oversold reading since 2008 in June 2018 and crossed into a buy cycle after the court decision. The appeal will put pressure on this turnaround, raising the odds for a breakdown that targets the rising lows trendline  (blue line) in the mid-$20s. Other technical measurements aren't easing shareholder anxiety, with a chronic failure to attract committed buyers presaging a long-term downtrend.

The bulls' defense line has narrowly aligned with $30, telling market players to watch closely when that number breaks on the intraday tape. A swift decline isn't likely unless it is news driven, setting the stage for bearish but choppy action until a stronger catalyst hits the newswires. It's also possible that a quick plunge into the upper $20s will signal a climax event, shaking out sellers before another weak recovery effort. (For more, see: AT&T and Time Warner Merger Case: What You Need to Know.)

The Bottom Line

AT&T is testing multi-year support near $30 after the U.S. government said that it would appeal the company's already completed merger with Time Warner. (For additional reading, check out: How AT&T Makes Money.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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