Nortel Networks Revisited

08/04/06 10:11:39 AM

by Koos van der Merwe

Once more in the news, with one analyst shouting SELL and another shouting BUY, what is the correct way to go with Nortel?

Security: NT
Position: Accumulate

I last reviewed Nortel (NT) on September 13, 2005, and came to the following conclusion:

Is Nortel a buy at the present price? The trumpet (widening) formation of the trendlines are telling us to be careful. A widening formation suggests uncertainty, and the maxim "When in doubt, stay out" will apply. My recommendation is therefore to use Nortel for trading, but the risk is there. Keep your stop tight and above all, BE CAREFUL.

... and I was correct. As you can see from Figure 1, Nortel rose until October 17, 2005, and then fell to reach a low of $1.92 by August 2006, in what looks like a falling wedge.

What brings Nortel to my attention now? Two things:

1. How much lower can this once-high flyer fall? The company is starting to sell assets to reduce debt, or are they simply selling assets to reduce costs, or getting rid of the lossmakers? At least management is trying to do something positive rather than simply repeat previous flaws in past years' balance sheets. Is the company profitable? Not yet, but then, who knows what is going on in the company. Any fundamental analysis is pure guesswork.

FIGURE 1: NORTEL NETWORKS. Is it is a buy? Charts are saying, possibly.

Graphic provided by: AdvancedGET.

2. Studying the charts shows that something is happening:
-The falling wedge. A very powerful correction pattern. Should the price rise and break above the resistance line A-B, then we could see a strong move upward. At the moment, the price to break is $2.10, and with today's price at $1.99, this could happen and soon.
-The relative strength index (RSI), which is gradually rising, having given a buy on June 13.
-What I call the lower bottom pattern. This is a pattern where the rise since the new low that formed has broken above the previous low. I have always regarded this pattern to be a short-term bullish pattern.
-The double bottom that has developed at $1.92. This is a bullish pattern.

To conclude, in spite of Nortel's notorious history, its charts are suggesting that the share could be a speculative buy, should it break above $2.10.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.