Caution: Run From This Stock and Don’t Look Back

Sometimes you have to know when it’s time to hang up or disconnect from a bad call. And in our opinion, AT&T Inc. (NYSE:T) is dialed into this type situation, and much to the chagrin of T stock investors. Let me explain.

T stock is going higher, or so I thought. Just under a month ago (and shortly after AT&T’s better-than-expected and well-received earnings report), the call was for shares of T to rally and affirm an emerging uptrend off a staunch technical bottom.

The call failed miserably and if there is to be any finger pointing, there are some prime suspects behind investors’ collective about-face in T stock.

For one, there’s been growing investor weariness over debt tied to the pending Time Warner, Inc. (NYSE:TWX) deal and possibilities of a future dividend cut.

Over this period shares have also felt some pressure as AT&T entered the courtroom.

The company is in litigation tied to a deceitful marketing lawsuit against its DirecTV unit and one which could cost the company $3.95 billion.

And now, the latest and less-than-great news is Wednesday’s raised competitive threat from T-Mobile US Inc (NASDAQ:TMUS). The industry upstart has announced free Netflix service to new family plan subscribers. And bottom line, this strategist’s optimism for T stock has been disconnected in the process.

T Stock Weekly Chart

If you’ve heard the advice to cut your losses and let your winners run, T stock has made the technical case for bullish investors the past couple weeks, to take a small loss and move on.

Last month, I presented evidence shares of AT&T had bottomed on the weekly view. In our estimation T stock was offering a pullback opportunity to investors on the days following a massive, and well-built, double-bottom base off key 62% support.

Technically, support has not been breached in T stock. I see little reason in waiting. Bottom-line, the severity and speed of the move back towards a full-blown test of the low trumps remaining optimistic — and yes, despite Wednesday’s earnings gap fill. Having said that, I’m making the call to hang up on T stock and respect price action strongly suggesting an impressive base has already failed.

T Stock Bear Put Spread

Given our view T stock will break its double-bottom near $36, a sprinkle of seasonal market pessimism and mixed option premiums, I like the Oct $36/$34 bear put spread for positioning.

Priced for 50 cents mid-market with shares at $36.56, the position offers traders stock risk of less than 1.50%, a breakeven roughly 1% below the described technical support and a potential return of $1.50, or 300%, if T trades below $34 at expiration.

T stock under $34? That may seem like a stretch as it’s a full 7% removed from current prices. But given the prep work and failure to connect with investors, an opportunity to profit from a bearish breakdown is looking fairly dialed in, all things considered.

— Chris Tyler

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Source: Investor Place