Kiss of Death for Australia’s Biggest Bank

Kiss of Death for Australia’s Biggest Bank

A couple of weeks ago, something major happened to Australia’s biggest bank.

No one in the mainstream is talking about it.

Yet they should be.

It’s called the ‘death cross’. And it’s a very bearish indicator for stocks when it pops up.

What is it?

I’ll explain…

Recently, I strolled past a co-worker’s desk. On his screen was a long-term chart for Commonwealth Bank of Australia [ASX:CBA], showing a couple of support and resistance lines.

Take a look:

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Commonwealth Bank of Australia weekly/five-year chart

Source: Yahoo Finance

At the start of the year, CBA shares traded for $80. But the lofty high didn’t stick; for most of 2018, the share price has struggled to stay above $75 per share.

With some basic chart lines drawn, the question is: What next? Will CBA shares surprise and head up? Or is this it…and is the fall of the banking giant about to begin?

My co-worker said banks in Australia don’t fail. The drop was temporary, he claimed. Surely, he figured, end of financial year reports will show bumper earnings, complete with an increase in dividend payouts.

He reasoned that a ‘price spike’ to $80 per share can’t be ruled out. But he reckons the chart above suggests a downtrend, and that CBA shares are going south.

I told him CBA shares are heading to $65 per share, perhaps bottoming at $50 for the foreseeable future.

Was I wrong to suggest that CBA is going to hit a low not seen since 2013? Especially at a time when Aussie banks are reporting record profits year-on-year? After all, last financial year the Big Four banks earned a collective $30 billion in profits.

But the chart didn’t look positive. That falling share price doesn’t suggest a buy signal to me…

I returned to my desk, and had another look at the chart.

Only this time, there was something was different.

For my charts, I have a default setting in place. So no matter what stock I open up to have a look at, I always see a couple of basic technical indicators. One of them involves the 50-day simple moving average (SMA) and the 200-day SMA.

And that’s when I saw it…

CBA weekly/five-year chart

Source: Yahoo Finance

The 50-day SMA (yellow line) had fallen below the 200-day SMA (blue line). I’ve marked this with a black arrow to make it more visible.

What you are looking at there is bad news for CBA. When the 50-day SMA drops below the 200-day SMA, it’s what’s known as the death cross.

Why is that crossing important?

The 50-day SMA is a short-term indicator, whereas the 200-day SMA is long-term indicator. When both are rising, that suggests a clear bull market. But when they start intersecting like this, it suggests the share price has further to fall.

More to the point, when the 50-day SMA did break above the 200-day SMA in July 2017, the 50-day SMA uptrend didn’t last long. And it barely rose above the 200-day SMA trend line. Often the 200-day SMA trend acts as a point of resistance for stocks.

The longer-term indicator could be a barrier that the share price can’t rise above.

Let that sink in for a moment.

The biggest bank in Australia just saw the death cross etched into its share price chart. To boot, this is second time it’s occurred since July 2016. Meaning two bearish indicators in as many years.

For the record, CBA has seen the death cross a couple of times before. Prior to the July 2016 death cross, the last time this happened was in October 2008. That was when the share price was trading at $40.

Don’t be surprised then to see CBA drop to $50 a share.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia