SG Stock Focus DBS at risk of medium term corrective down move

Q4 2017 earnings session for the Singapore stock market has just kick-started and for this week, we will be moving into a higher gear as the heavy bellwethers constituents of the benchmark FTSE Straits Time Index (STI); the three local banks, DBS Group (DBS), United Overseas Bank (UOB) and Overseas-Chinese Banking Corp (OCBC) will start to report their numbers.

The upcoming Q4 2017 earnings report dates and median earnings estimates of the three banks are as follow (data from Bloomberg):

• Thurs, 08 Feb 2018 – DBS expected Q4 EPS at 0.32 (26.8% y/y) versus Q3 EPS of 0.46
• Wed, 14 Feb 2018 – UOB expected Q4 EPS at 0.52 (15.6% y/y) versus Q3 EPS of 0.49
• Wed, 14 Feb 2018 – OCBC expected Q4 EPS at 0.23 (36.8% y/y) versus Q3 EPS of 0.25

The share prices of all the three banking stocks have outperformed the benchmark FTSE STI by a wide margin in 2017 where the returns of DBS (43%), OCBC (38%) and UOB (29%) surpassed the FTSE STI 2017 annual return of 18%.

Since the start of 2018, all the three banks have continued to post robust monthly returns for Jan in the range of 4% to 6%. In addition, the rosy expectations of the banks’ Q4 earnings numbers have been built around these themes;

• Reflationary environment where commodities prices as indicated by the benchmark CRB Commodity Index that has staged a rally of close to 30% from its Jan 2016 low coupled with a solid economic growth backdrop as seen from global PMI readings on both services and manufacturing sectors.
• A stabilised commodities space will lead to a recovery in the battered Singapore oil and gas sector where all the three banks have a significant loan book exposure. A reduction in bad loans provision in this sector should improve the banks’ bottom line (profits).
• Continued uptick in 3-month SIBOR (Singapore Interbank Offer Rate) that moved in tandem with short-term U.S. interest rates will trigger uplift in net interest margins.

However based on a technical analysis perspective, the current run-up in share prices of the banks seem to have almost priced in such positive fundamental drivers and at risk of shaping a potential corrective decline of 7% to 15% in the medium-term (1 to 3 weeks) within a longer-term primary uptrend that is still in place since Feb 2016 low.

Let’s us now take a look at the charts of DBS.

Medium-term technical outlook on DBS (SGX: D05)

Key technical elements

• The primary up move of around 110% from its 13.01 low of Feb 2016 has been overstretched where signs of a medium-term (1 to 3 weeks) of corrective decline/phase have emerged.
• Bearish signals that advocate the aforementioned potential medium-term corrective decline are as follow; a weekly bearish “Shooting Star” candlestick pattern followed by a weekly bearish “Hanging Man” pattern that indicates a risk of a reversal in the current bullish sentiment, the weekly RSI oscillator has started to inch down from its extreme overbought level of 85% coupled with a bearish divergence signal seen on its daily RSI.
• Interestingly, the abovementioned bearish signals are formed right below the lower limit of a significant resistance zone of 27.40/28.20 which is defined by a Fibonacci projection cluster.
• Based on the Elliot Wave Principal/fractal analysis, the intermediate degree bullish impulsive wave (3) structure in place since 31 Oct 2016 may have ended at the 27.40 level (based on a cluster of Fibonacci projection levels) where the next intermediate cycle highlights the risk of a medium-term (1 to 3 weeks) of corrective decline/wave (4) to retrace the up move from 31 Oct 2016 low.
• The significant medium-term supports rest at 24.30/24.00 (former major swing high area of Dec 1999 + 23.6% Fibonacci retracement of the up move from 31 Oct 2016 low to 25 Jan 2018 high) follow by 22.60/25 (lower boundary of the ascending channel from 31 Oct 2016 low + medium-term swing high areas of Jul 2015/Jul 2017 + 38.2% Fibonacci retracement of the up move from 31 Oct 2016 low to 25 Jan 2018 high).

Key levels (1 to 3 months)

Pivot (key resistance): 27.40

Supports: 24.30/24.00 & 22.60/25

Next resistances: 28.20 & 29.20

Conclusion

Therefore as long as the 27.40 key medium-term pivotal resistance is not surpassed, DBS is likely to kick-start a medium-term corrective decline phase within its long-term primary uptrend to target the support at 24.20/24.00 and below opens up for a further potential weakness towards 22.60/25 next.

However, a clearance above 27.40 should see an extension of the up move from 31 Oct 2016 low to towards the next resistances at 28.20 follow by 29.20.

Charts are from eSignal

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