Dow component Verizon Communications Inc. (VZ) could break out above five-year resistance following Tuesday's pre-market earnings report, while shareholders of rival AT&T Inc. (T) hope that Wednesday's pre-market report lifts the underperforming giant off the bottom of a five-year trading range. The first release is likely to set the tone for the second, with good news out of the gate translating into higher prices for both companies.
A highly competitive smartphone market has forced AT&T to seek growth through acquisitions in recent years. It has added DirecTV and Time-Warner to its roster since 2015, but the U.S. Justice Deptartment continues to appeal the Warner hook-up, citing antitrust issues. The industry environment will grow more challenging for AT&T and Verizon if the proposed merger between rivals T-Mobile US, Inc. (TMUS) and Sprint Corporation (S) passes a gauntlet of opposition.
Verizon Communications stock posted major gains between the mid-1980s and the third quarter of 1999, splitting three times during an ascent that ended at an all-time high in the mid-$60s. It sold off to the mid-$20s in 2002, establishing a trading floor that was broken during the 2008 economic collapse. That plunge marked the end of a nine-year downtrend, setting the stage for a rapid recovery that stalled within 10 points of the prior century's high in 2013.
Breakout attempts in 2014, 2016 and 2017 failed, while a narrow range-bound pattern encouraged fresh risk-taking in the low $40s. The stock returned to resistance in January and August 2018, while two-month price action has carved a rectangle pattern that could support a major breakout in reaction to strong quarterly metrics. In turn, that bullish behavior would open the door to a long-awaited test at the 1999 high.
A breakout would translate into around 15% potential upside because major highs from prior eras generate steep resistance that have the power to end an uptrend dead in its tracks. However, downside risk would be limited as well, with new support in the mid-$50s unlikely to break. A healthy 4.39% forward dividend yield may be the deciding factor for potential shareholders, adding to modest rally gains.
AT&T followed the same trajectory as its rival following the company's historic 1984 break-up, also splitting three times while rallying from the single digits into January 1999's all-time high at $59.94. The stock sold off into the upper teens in 2003, marking the lowest low in the past 15 years, ahead of a weak recovery effort that stalled in the low $40s in 2007. It gave up the majority of those gains in 2008, dumping to a five-year low at $20.90.
The subsequent uptick took nearly eight years to reach the prior high, triggering a reversal and downtrend that gathered steam into the third quarter of 2018. The stock undercut 2015 support in July, bouncing at a six-year low and gaining less than three points in the past three months. This bearish positioning adds considerable risk if the company reports unusually weak earnings, potentially triggering a breakdown into the mid-$20s.
However, the monthly stochastics oscillator has entered a confirmed buy cycle, while five months of testing at the 2015 low and 200-month exponential moving average (EMA) now looks complete. If so, the stock could bounce strongly after earnings and finally mount stubborn 200-day EMA resistance in the mid-$30s. That price action would also establish a higher trading floor, favoring healthy upside well into 2019.
The Bottom Line
Verizon and AT&T report earnings this week, with short-term tailwinds predicting buy-the-news reactions that positively affect their longer-term technical outlooks.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>