Nortel on the Move - Time to Snag this Bottom Fish?

11/05/02 09:33:33 AM

by Matt Blackman

There are both fundamental and technical clues that Nortel's worst trading days may be behind it. It would be a gutsy move but one that could reap handsome rewards if the telecom dog days are finally over.

Security: NT
Position: N/A

The most recent rally in the markets is now in its fourth week and the signs look positive. Earnings news for bellwether technology companies like IBM, Microsoft, Cisco and Dell has been casting rays of hope to investors who are now sitting up and taking note. While this turn is filling bulls with confidence and bears with trepidation, it is important to put it in perspective. This is the sixth such rally since markets turned down in early 2000. The gain has averaged 22 percent. Does this latest move signal the end of the 32-month old bear or is it just another shorter-term bounce?

While the jury deliberates this question, it has created some bottom fishing opportunities for traders not afraid of throwing a line out to battle-scarred tech companies, and Nortel (NT - NYSE and NT - TSX) is no exception. Since hitting a high of $89US in July 2000, the chart looks like a free-falling boulder coming from a peak on Mt. Everest. But the rock has come to rest and unless there are more market or corporate catastrophes to shake it free, it should stay put -- for the time being at least.

There are fundamental and technical clues that the bottom for the stock may be behind it. Trading around 1.5 times book value of just 50 percent of the communications industry average, the stock is just above its cash value of $1.08US per share. The price-to-sales ratio is only 0.53. Industry rival Qualcomm Inc. has a current price-to-sales ratio of 9.08 and trades around six times book value.

NT stock recently tested and broke up through its 10-week moving average and has shown a number of volume spikes, both encouraging signs. Positive divergence between the Chaikin money flow (CMF) and price is a sign that money is no longer leaving the equity. A similar divergence exists between the regular weekly money flow index (MFI) and price as well. I have found both money flow indicators to be useful in providing a heads-up on impending price changes, and while not 100 percent accurate, such divergences cannot be ignored.

Figure 1 - Weekly chart of Nortel Networks (NYSE) between November 2000 and October 2002.

Graphic provided by: StockCharts.com.

There is no way to rule out another test of the most recent support level of $0.76 and in fact such a move again meeting resistance would be even more bullish and would alleviate the stocks overbought position and provide a solid platform for another advance. Recent fundamentals and stock activity provide hope that Nortel will survive and one day in the distant future might even enjoy stock values approaching those of the tech "good ol' days.'"

There are encouraging signs but jumping on this stock at these levels must still be considered a gamble. A stop-loss is essential in case it heads lower again. If investors begin to dive in, however, the upside ride could be well worth the price of admission.

Relying on fundamental or technical data independently can and does result in buying or selling at the wrong time. But like an Apache scout who depended on all available clues to track his quarry in the rocky badlands, utilizing fundamentals and technicals together reduces the likelihood for error. The trick is in knowing how to properly gather, interpret and apply the data. In these volatile markets, we need all the help we can get.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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