The telecommunications sector, which comprises companies that provide the connectivity and communication services that we have all so heavily relied on in these times, is fundamentally well positioned to make strong gains over the year ahead. From the perspective of active traders, nearby support levels and recent breakouts are confirming the macro-level thesis and could be a catalyst for a major move higher over the weeks and months ahead.
- Strong demand for communication services is a theme that is capturing the attention of active traders.
- Bullish crossovers between long-term moving averages suggest that a long-term uptrend in the sector could just be getting started.
- Nearby support levels are creating lucrative risk/reward setups across the telecom sector. Traders will likely use the identified trendlines to determine the placement of stop-loss orders in case of a shift in sentiment.
SPDR S&P Telecom ETF (XTL)
Active traders looking to gain exposure to niche market segments such as telecom often turn to exchange-traded products such as SPDR S&P Telecom ETF (XTL). Fundamentally, the fund comprises 43 holdings including alternative carriers, communications equipment, integrated telecommunications services, and wireless telecom services.
As you can see from the chart below, the bulls have been in clear control of the momentum since the price of the fund found major support near its 200-day moving average. Followers of technical analysis will likely want to note the recent break beyond the dotted trendline because it could be a signal that we are in the early stages of the next leg of an important uptrend. From a risk-management perspective, stop-loss orders will most likely be placed below the dotted trendlines or one of the moving averages, depending on risk tolerance and outlook.
Infinera Corporation (INFN)
As one of the top holdings of the XTL ETF, Infinera Corporation (INFN) will likely be of specific interest to technical traders because it recently broke beyond the resistance of a defined triangle pattern. The recent bounce from the 200-day moving average and subsequent close above $8.50 suggests that the bulls are in control of the momentum.
Based on the pattern shown below, short-term target prices could be set near $13, which is equal to the entry point plus the height of the pattern. Stop-loss orders will likely be placed below one of the dotted trendlines or the major moving averages to protect against a sudden shift in market sentiment or company fundamentals.
The telecom sector, as measured by the S&P 500 Communication Services Sector, has outperformed the broader market with a total return of 16.6% over the past 12 months compared to the S&P 500's total return of 12.0%, as of Nov. 3, 2020.
Plantronics, Inc. (PLT)
Another top holding of the XTL ETF that could capture the attention of traders over the months ahead is Plantronics, Inc. (PLT). Looking at the chart below, you can see that the surge in buying interest over the past several months has triggered a bullish crossover between the 50-day and 200-day moving averages. The popular long-term buy signal is often used by followers of technical analysis to mark the beginning of a major uptrend.
Active traders will most likely look to buy as close to the 50-day or 200-day moving averages as possible to make the most of the risk/reward setup. Traders will also likely maintain their bullish outlook on the stock until the price closes below one of the major support levels.
The Bottom Line
Fundamentally, the role of the telecom sector has never been more important than today. From the perspective of an active trader, nearby support levels and breakouts beyond key levels of resistance confirm the macro theme and suggest that now could be the ideal time to gain exposure to this important sector.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.