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Telecom getting hit hard

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Telecommunication-related stocks continue to get drilled to the downside today after recent news out of Qwest (NYSE:Q) that it was unable to access the short-term debt markets and had to access its bank credit facility. Share of Qwest (Q) are sinking to another 52-week low at $6.70 (-10.68%) and as unfortunate as this is for bulls in the stock, traders that are short/put some stocks in the group are seeing their accounts grow.

On February 9th, premierinvestor.net profiled shares of Time Warner Telecom (NASDAQ:TWTC) as a bearish play near the $9.49 level and while that seemed "late" to some, the stocks recent dive below the $7.00 level hints at how vulnerable the sector has become.

Time Warner Telecom Chart - Daily Interval

Shares of TWTC have exceeded their bearish vertical count of $7.50 and I'd suggest traders lower their stops to that level. If the stock wants to break below our retracement we'll let it, but at the same time, in a rather range-bound broader market environment, we don't think traders should be letting 25% gains in a 5-session span slip through their fingers.

Fiber Optic Index Chart - Daily Interval

It has been my concern for sometime that the weakness in some of the telecom stocks would have some of the "telecom/hardware" stocks susceptible to lower prices. The Fiber Optic Index (FOP.X) is sinking to a new 52-week low so we're dragging the lower end of our retracement bracket down and trying to keep some integrity with past trading levels. It's is always difficult to pick a bottom, but a trader that will trade levels can perhaps envision how the FOP.X is in a lower-end of retracement.

I would not use this observation as a reason to enter bullish positions, as there is not any sign of strength at this point and depicts that of a falling knife. However, a bearish trader that has some handsome gains in recent sessions will want to lower some stops to help capture profits if we are indeed entering would could be an accumulation zone.

With some of the telecom stocks continuing to see pricing pressures due to increased competition that puts pressure on earnings, many of those carriers have been cutting their capital expenditure budgets. That will put pressure on many of the telecom equipment stocks like Lucent (LU) and Northern Telecom (NT). When they (LU and NT) cut back on their budgets to try and bolster a weakening bottom line, that then has a negative impact on many of the fiber-related stocks.

Stocks comprising the Fiber Optic Index (FOP.X)

ALA, AMCC, CDT, CIEN, CSCO, EXFO, FNSR, GLW, HLIT,
JNPR, NEWP, NT, ONIS, PMCS, Q, SFA, TLAB, VTSS

Jeff Bailey
Senior Market Technician
Option Investor

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