SprintNextel's Big U-Turn

10/08/12 10:58:06 AM

by Donald W. Pendergast, Jr.

Sprint Nextel found solid support at its 50-day exponential moving average on October 3, quickly recovering some recent losses.

Security: S
Position: N/A

Shares of Sprint Nextel had a noticeable bounce after news of the planned T-Mobile/MetroPCS merger hit the wires on October 3, 2012, rising more than 6% during Wednesday's trading session. At first glance, it might seem that it was the news and news alone that was responsible for the sharp bullish turnaround, but if we look more closely, we may learn that other forces were at work that may have already destined the stock to surge higher at that particular time and price juncture. Here's a closer look now.

FIGURE 1: S, DAILY. With shares of SprintNextel declining to an important multidimensional (Fibonacci confluence/50-day EMA/40-day cycle low) support level at the same time as news of the T-Mobile/MetroPCS deal was revealed to the media, it's little wonder why the stock managed a gain of better than 6% on very high daily volume.

Graphic provided by: Sentient Trader.

After SprintNextel (S) completed a minor triple-bottom pattern on May 18, 2012, the stock really began to fly, running up from 2.32 all the way to 5.49 on August 15, 2012. The stock was at the top of the comparative relative strength rankings on both the four- and 13-week time periods for much of that astounding run as momentum traders and institutional money managers continued to pile into the issue. See Figure 1.

Inevitably, a proportional correction ensued, dragging S down for a brief nine-day period before the stock went on to make a new yearly high on September 25, 2012, at 5.76. Short-term money flows were seriously deteriorating for all of August and September 2012, meaning that a wise technician would already have known that some sort of a more significant pullback was yet to appear.

That decline began right after the 5.76 yearly high was reached early last week, and S plunged by nearly 17% as of October 3, 2012, just before news of the T-Mobile/MetroPCS deal was unveiled, the stock bouncing higher from its 50-day exponential moving average (EMA) as the news hit the media.

Now, while it is true that the news did play a role in helping S bounce sharply higher, it's important to understand that the news release was not the primary reason for the surge, but merely a catalyst or precipitating event that triggered a strong round of buying as three separate technical dynamics converged at the same time as the news event:

1. The stock found strong Fibonacci confluence support near 4.90/5.00 at the same time that it also

2. Found strong support at its 50-day EMA near 4.84, and also

3. Dipped well into the zone of its projected 40-day cycle low zone (green shaded area on chart).

Add to all of this technical backdrop the fact that S has been one of the hottest stocks of 2012, with latecomers just dying for another chance to go long, and you can see why the news event was merely the spark that lit the fuse for the explosive bullish move higher from a highly anticipated area of support.

Would S have surged as high without the news event? Perhaps not, but there can be little doubt that serious investors and traders would have discounted the potential for a powerful bullish reaction off of such a major combination of support and/or cycle lows at the 4.85 to 5.00 price level.

FIGURE 2: BREAKOUTS. The .OEX components making price/volume breakouts on Wednesday, October 3, 2012.

Graphic provided by: MetaStock.

Graphic provided by: MetaStock Explorer.

The long-term money flow (based on the 100-day Chaikin money flow (CMF)(100) histogram) in S is excellent, with no sign of negative divergences with price as of yet. Short-term money flow is slightly negative, however, and it will be important for the stock to mount a continued rally past that 5.76 swing high soon if the massive long-term uptrend is to continue to inspire confidence in the bulls. See Figure 2.

Playing S on the long side here is pretty simple -- a break above October 3's high of 5.27 will imply that more follow-through is likely, perhaps up into the red shades time/price projection zone (see projection values on the chart).

If filled on a rise above 5.27, place a sell-stop loss (GTC) at 4.78 and then wait to see if there is enough of a rise to allow you to run a two-bar trailing stop of the daily lows (as long as it's higher than 4.78, of course).

Look to take partial profits near 5.68 (the last minor swing high) and then just let the rest run until the final stopout. Make sure you risk no more than 1% to 2% of your account value on this hypothetical trade, no matter how bullish you may feel about SprintNextel's prospects at the moment.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

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SprintNextel's Big U-Turn

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