This Breakout Move Is About to Face Its First Test

Up until late October, Verizon Communications (VZ) had a miserable year.

While the rest of the market rallied, the telecommunication conglomerate was stuck in a downward trend.

From its peak on January 6 to its October low, VZ lost close to 30%.

But after bottoming in October, VZ gapped higher off the back of its Q3 earnings. It beat consensus forecasts and announced solid customer growth.

VZ has recently traded up around 27% since October 6.

So let’s check where it could be headed next…

Breakout Move

The chart of VZ below shows a textbook downtrend in action.

After its peak in early January, VZ made a series of lower highs and lower lows. The long-term 50-day moving average (MA, blue line) steadily trended lower:

Verizon Communications (VZ)

Source: eSignal

As the chart shows, the reversals from those lower highs coincided with the Relative Strength Index (RSI) forming an inverse ‘V’ and tracking lower from overbought territory (orange circles).

The 10-day MA (red line) crossing beneath the 50-day MA confirmed VZ’s later down legs.

Apart from the brief spikes to lower highs, the RSI remained stuck in its lower band throughout most of VZ’s downtrend. It was unable to break up through resistance (green line).

That’s a typical RSI pattern in a downtrend.

And notice that VZ’s lower lows correspond to the RSI rallying out of oversold territory (lower grey dashed line).

The bottoms in March and July came off the back of the RSI forming a ‘V.’ And in May and October, the RSI steadily trended higher.

As you can see with VZ’s current rally, though, the RSI’s pattern is different from those previous counterrallies after it broke through resistance.

Those earlier peaks saw the RSI only track briefly in its upper band. That’s why they soon rolled over.

In this latest move, the RSI has stayed in its upper range longer, showing a prolonged period of buying momentum.

And that has driven VZ’s rally much further.

Take another look:

Verizon Communications (VZ)

Source: eSignal

But the RSI is recently looking stretched in overbought territory. So that up-move could soon become shaky.

What should we look for around here?

Switching Momentum

For a stock to rally as quickly as VZ, it takes a strong surge in buying momentum.

But it only takes a small reversal in that momentum to make the stock vulnerable to a pullback.

And that is what we’re seeing right now…

The RSI made an inverse ‘V’ and is tracking lower. A move back toward support (green line) could see VZ trading back around $36.

After such a strong move, those who got in on the trade will become increasingly anxious about a pullback taking away their profits.

So if the stock does look like it’s rolling over, they could rush to the exits, increasing the likelihood of a bigger move down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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