AT&T set to recover against the telecom sector

At the start of 2014, I gave an outlook for the telecom sector and I will update that here.

SPX 500 Integrated Telecom Services vs. S&P 500 Index

In January, there was no RSI or Performance Ranking (PR) divergence, so no reason to look for a low. Now there is bullish RSI divergence but there would be a better case for a low if the PR had bullish divergence also.

Sector breadth

Breadth for the iShares US Telecom (IYZ) had a divergence in January. No new price nor breadth high has been made since on either the 200 day moving average breadth or the 50-200 day moving average crossover breadth.

IYZ and % above 200 day moving average

The 100 day moving average breadth peaked at 80% at Christmas. I stated that the long term breadth divergence meant that a move back below 50% may not lead to a good buying point. The test of price resistance failed, so this is true so far.

IYZ and % above 100 day moving average

T v IYZ

I showed AT&T (T) v IYZ with a form of RSI divergence, backed up by PR divergence. Now, there is a more ideal divergence, with RSI below 30 and a more pronounced PR divergence (so the sector is ranked slightly better on price performance).

T v IYZ weekly

Also, there is bullish divergence on the 14 day RSI.

T v IYZ daily

Trade set up

In my RSI divergence trade set up, I ideally look for a move above the intervening weekly RSI high. I have increasingly found this to be too far away (42.9 from 22 November in this case). A weekly reversal bar can be used, I must also state this requires a weekly RSI move back above 30.

I will open a long position in T v IYZ on a Friday close of the 14 week RSI above 30. The stop loss is at a new low for the relative line.