Interactive Investor

Chart of the week: This bank's a low-risk buy

16th July 2018 11:13

John Burford from interactive investor

Technical analyst John Burford has spotted a potentially bullish indicator for this bank share. A recovery here could easily trigger a dramatic short squeeze.

Is Deutsche Bank now a buy?

Can you think of another large cap share (founded in 1870, so no hot crypto fly-by-night company) that trades below its 2009 Credit Crunch lows?  Neither can I.

And that is what is intriguing to me in addition to its chart patterns.  Not only that, but it was/is one of the 'too big to fail' giant banks that governments and central banks refused to let go bust.  That almost guarantees the shares will never go to zero.

The question is: at under €10, how much lower can they go, even assuming a doomsday scenario for the financial sector that so many predict?

Here is the disastrous long-term chart:

Source: interactive investor      Past performance is not a guide to future performance

Long term investors have certainly suffered over many years.  The decline in value from the 1998 high at €140 to the 2009 low at €14 is a staggering 90% of its value.   As it happens, this is the minimum reduction in value in a savage bear market that usually follows a manic bull run (a phenomenon not usually associated with a major bank).

So, is the selling totally overdone?  And is this a Buy Low/Sell High candidate?

The nature of the recovery off the 2009 lows is instructive.  First, we saw a very sharp rally phase to the €56 area in 2010, but then a series of highly overlapping waves taking it down to the recent all-time lows.  When I see this overlapping wave behaviour, it strongly suggests a corrective pattern – and that is potentially bullish when the trend ends.

And has it ended with the 27 June low at €8.75?

Here is a close-up on the daily chart of the latest large wave down:

Source: interactive investor      Past performance is not a guide to future performance

One encouraging sign is that zero-to-none analysts are bullish.  That is because they are almost all trend followers and precious few of them contemplate a change in an established trend – until well after it has occurred, of course.  Being a contrarian is not a career enhancer.

In fact, analysts are some of the biggest herders in the business.  That is why they almost never anticipate trend changes.  But have I just done that?

The market last week bullishly pushed above the upper wedge line and is kissing it in preparation for an advancing phase.  I have a potentially complete five waves down and a huge momentum divergence – usually a precursor for a strong reversal.

I maintain that buying around here is a very low risk/high probability stance with my first target at the €12 level with higher potential.

MORNING FLASH: I wrote the above copy on the weekend and by 11am Monday, the market is surging to the €10.50 area from the €9.50 Friday close – a huge gain of 10%.  An almost timely post!

John Burford is the author of the definitive text on his trading method, Tramline Trading.  He is also a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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