Chart review of the Commonwealth Bank.

By Kenneth Robson on July 12, 2014 • ( 1 )

Background information

This post seeks to use technical analysis for gauging the market impact of the disclosure of dishonest dealings and later cover-up by the financial planning arm of the Commonwealth Bank (CBA) from 2003 to 2012. Appalling misconduct, that reflected a bank culture of exploitation of the wealth of 1300 frail elderly clients, has now been brought to light. One of several at fault advisers was the main offender in the wake of the Global Financial Collapse. He is thought to have been responsible for the loss of $300 million in client funds.

A group of courageous whistle-blowers, one of whom has now passed away at only 36, met with hostility when they disclosed these dealing to ASIC. To their consternation ASIC was slow to act, and intimidated by the prospect of bringing the CBA to heel. As a result, spokesman for the whistle-blowers Jeff Morris, went public to the Financial Review whose inquiry resulted in a Senate Committee Investigation concluded in the last few weeks. It is scathing of both the CBA and ASIC, and it has called for a Royal Commission into both organizations, a request that Joe Hockey is saying is unnecessary.

Richard Gluyas and Rick Wallace reported in the Australian, July 3, 2014, on the speech of apology by CBA Chief Ian Narev. He disclosed that $52 million has already been paid in compensation to more than 1100 customers. He pointed out that customers would still have lost much money even if placed in more conservative investments. The Senate Committee Chairman Mark Bishop however thinks that more adequate compensation would be of the order of $250 million. Narev blames “a cowboy culture among dodgy planners in CTP”, and has pledged to carry out new processes, impose stricter supervision, and set higher standards of training.

One can’t help but feel skeptical as to whether internal investigations and self-imposed reforms will be adequate. The real issue in my opinion is whether the profitable vertical integration of financial planners into the bank’s wealth creation hierarchy creates ethical conflict of interest issues for staff, and particularly for the advisers.

The public should consider consulting planners independent of links with financial institutions.

http://www.smh.com.au/action/printArticle?id=4454834

http://www.theaustralian.com.au/business/financial-services/sorry-cba-to-hold-independent-review-into-scandal/story-fn91wd6x-1226976174278?nk=3a6fa5f1777397de5b9f76e50f301412

http://www.abc.net.au/news/2014-06-26/senate-inquiry-demands-royal-commission-into-asic-cba/5553102

Disclaimer

This post does not profess to provide investment advice. It attempts rather to inform of technical considerations of relevance.

Technical observations

The changes in the share price of the CBA in the last few weeks may or may not be due to these media revelations but the inference is that they are.

This is a daily chart over the past six months using candlesticks. It also shows plot lines for volume and the RSI.

Price action breaks through trend line.

The uptrend started early February, accelerated mid-April, and was broken mid-June as a triangular trading range emerged with a downward sloping upper border, and a horizontal lower edge. Support has appeared at $80. This appearance suggests that a break-out to the downside is perhaps more likely than one to the upside.

This is a weekly chart of CBA with candlesticks overlaid with the multiple moving averages of Daryl Guppy.

Still climbing

It shows that a strong uptrend emerged at $47.50 in March 2012. It is intact to the present for medium to long-term investors. A high of $82.68 was reached 13 June. Since then the weekly highs have declined. At this stage the averages have yet to cross-over. This should encourage long-term holders to continue to hold their positions.

Thisis the daily chart with the same features.

Exit signal for traders?

It highlights the trend that carried the share price from entry at $75 in March this year, to $82.68. It is just starting to lose momentum. There are declining highs, down sloping, crossing short-term moving averages, and dipping of the short averages well into the band of medium term averages. They warn of possible trend change which should be looked for carefully in the coming few weeks.

Conclusions

This news so far has had little adverse impact on the share-price.

CBA should be able to assimilate a worst-case loss of $250 million without difficulty, but could this incident damage CBA’s present impeccable image?

The shares are now trading close to historic highs. Any further adverse report such as a profit downgrade, or deterioration in trading conditions might trigger a fall, most likely after they next go ex-dividend.

In this setting prudent institutions with large holdings who are sitting on significant unrealized profits start selling-down some of their shares to reduce their holdings and risk. This shows as a characteristic pattern in which there are steady lines of support and resistance in a trading range.

Traders should not assume that the next movement will be a break-out to the downside, and enter short positions. If the build-up of shorting is excessive, trading providers will reduce their risk by buying stock on market. This is likely to take out the stops of the “shorters” who are then forced to buy shares at higher prices from the trading providers. In this situation the share-price will often gap abruptly higher, attracting more retail buyers. Eventually when the institutions are happy with their holdings, the share price is likely to sink.

What is the next target should the share-price continue to trend upwards?