T-Mobile Investors Growing Skeptical About Sprint Merger

T-Mobile US, Inc. (TMUS) stock is running in place on Thursday morning after the company beat fourth quarter profit expectations while posting in-line revenues. The company told analysts that it would add 2.6 million to 3.6 million "branded postpaid net customers" this year, a figure that excludes low-margin prepaid accounts. The number also excludes net additions if the proposed Sprint Corporation (S) passes muster with government regulatory agencies. 

CEO John Legere recently sent a letter to Federal Communications Commission (FCC) Chair Ajit Pai, trying to move the $26 billion merger forward by promising not to increase plan prices for three years and insisting that the new company would offer equal or better rates than either carrier does now. However, the merger would permanently alter the U.S. wireless landscape, dropping the number of big players to three. History tells us that this is a recipe for cartel-like monopoly pricing.

TMUS Long-Term Chart (2007 – 2019) 

Long-term technical chart showing the share price performance of T-Mobile US, Inc. (TMUS)

The company's current incarnation began with an April 2017 initial public offering by parent Deutsche Telekom AG (DTEGY), opening in the mid-$20s and entering an immediate uptrend that topped out just above $40 in July. That marked the highest high for the next eight years, ahead of a downturn that accelerated during the 2008 economic collapse. Unlike many issues, deep lows posted through the first quarter of 2009 failed to generate a lasting bottom, with lower lows continuing into the January 2010 all-time low at $5.52.

A strong bounce into 2011 ended in the upper teens, giving way to renewed selling pressure that found support one penny above the 2010 low in June 2012. That marked a historic buying opportunity, completing a multi-year double bottom reversal while establishing a strong uptrend that finally reached 2007 resistance in 2015. It broke out 10 months later, posting higher highs into May 2017, when buying pressure evaporated in the upper $60s.

The stock has been stuck in a trading range for the past 21 months, with November 2017 and May 2018 reversals in the mid-$50s generating support within a rectangular pattern. It returned to range resistance in September and November but failed to break out, while a third attempt in January 2019 was equally unsuccessful. However, the long-term pattern shows progress, mounting a series of lower highs and successfully defending red trendline support in December.

TMUS Short-Term Chart (2017 – 2019)

Short-term technical chart showing the share price performance of T-Mobile US, Inc. (TMUS)

The stock posted three lower highs into May 2018, while the summer rally triggered a trendline breakout followed by several failed tests at range resistance. Downturns tested breakout support successfully in September and October, while December's violation was repealed in January. This process establishes support in the low to mid-$60s, which is now aligned with the 200-day exponential moving average (EMA). As a result, a breakdown through the moving average would signal a change in character that favors a trip back to range support in the mid-$50s.

The on-balance volume (OBV) accumulation-distribution indicator has slumped badly since September 2018, entering an aggressive distribution phase as soon as the rally reached range resistance. Ominously, this measurement has failed to react to a 10-point bounce off the December low, generating a bearish divergence that tells us many investors have grown skeptical about the merger outcome.

Price action has tracked a trendline of higher lows since 2015, with a successful test in December 2018. That line and horizontal range resistance will converge in November of this year, establishing a classic rock and a hard place pattern that can trigger powerful trends, higher and lower, with little volume. Meanwhile, the monthly stochastics oscillator crossed into a sell cycle in November, predicting continued weakness through the first quarter. Taken together, it's wise to expect the Sprint decision to generate a very strong reaction.

The Bottom Line

T-Mobile support and resistance lines are converging quickly, generating a bilateral scenario that is likely to yield a strong trend in reaction to the Sprint merger decision. Odds are equally weighted for higher and lower prices, making this instrument an interesting choice for an options straddle.

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

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