CSL – a watch on the technicals

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CSL Limited (ASX:CSL) is a $31.7 billion market capitalised company and is an ASX20 Index constituent. It is the tenth largest listed company in Australia by market cap and is the country’s largest listed health stock and therefore would be a key holding in many managed funds and SMSFs.

From September 2011 to March 2014, CSL’s stock price performance was stellar, rising 176%. And then there were dividends too.

However there are some strong technical signs that CSL’s share price might be in for some noteworthy underperformance compared to the wider market and there may just be a price retracement of some significance.

Technical signs of potential weakness

The first chart below, a 14-year weekly chart, shows CSL’s fall in the 2002/2003 bear market, its subsequent rise in the 2003 to 2007 bull market in Australia, the fall and consolidation during the 2008 bear market and, lastly, its brilliant price performance from September 2011.

There are four technical points to make over this period to set up the technical case for potential price weakness over the next few months:

  • The 2003 to 2007 price rise halted at between the 261.8% and 314% Fibonacci Projections, shown by the two horizontal black lines in the middle of the chart. These are projections measured relative to CSL’s price decline in the 2002/2003 bear market, shown at bottom left of the chart.
  • CSL’s price has recently reached a similar projection between the 261.8% and 314% Fibonacci Projections, shown at top right of the chart. Reaching, or nearly reaching 314%, is an indication of being over bought.
  • The two retracements that CSL experienced were 78.6% and 38.2% Fibonacci Retracements, respectively. The first retracement is shown bottom left and the second is in the middle of the chart.
  • The first retracement in 2002 to 2003 was a fall from $17.33 to $4.31, a fall that was just over three quarters of the rise CSL had achieved from its initial listing in 1994. The second retracement in 2008 to 2011 was a fall of just over a third (38.2%) of the 2003 to 2008 price rise.

Source: Beyond Charts

However, the most important technical sign of impending price weakness is the ‘head and shoulders’ pattern, a bearish pattern, which is shown in the daily chart below. This pattern has formed over the first half of 2014.

The ‘head and shoulders’ is depicted by the black lines with two ‘shoulders’, the lower peaks on either side of the ‘head’, a higher peak, in the middle. The ‘head and shoulders’ has a ‘neckline’, the upward slanting red trend line, which forms the signal line upon which to act.

Source: Beyond Charts

Nice name for a pattern but what does it mean? Technically, the right ‘shoulder’ is a lower peak than the ‘head’, meaning that price has not been able to make a new high, the first sign of weakness. The ‘neckline’ is a support line that is drawn at the two troughs at either side of the ‘head’. The above ‘neckline’ is as good a ‘neckline’ as one might see on a ‘head and shoulders’ pattern.

CSL’s price action has followed the technical analysis ‘head and shoulders’ bearish pattern to the book having tested the ‘neckline’ twice by attempting to rise above the ‘neckline’ after falling below it, and failing both times.

All these technical signs combine to signal a high probability that CSL’s price might undergo a period of weakness.

From here, the odds are that CSL’s price will make a new low below $66.16 and move lower or consolidate in a wide ranging sideways movement for some weeks or even months.

Where a share price retracement ultimately heads is always difficult to determine, as there are so many variables that will play a role. Using Fibonacci Retracements alone, in brackets, the projections are $66 (14.6%), $61.80 (23.6%), $55 (38.2%) or even all the way to the midpoint of the last 176% run-up, $$49.50 – $50.

Of course, if support holds at any of these levels and CSL moves higher to make a higher high, then this would signal an arresting of the share price fall and might indicate a resumption of CSL’s long standing up trend.

Fundamental signs of potential weakness?

CSL has been a near ‘life member’ since the 1990s of Share Wealth Systems Gold Medal List of fundamentally sound stocks on the ASX of which there are only 13 stocks that currently qualify for the Gold Medal List.

However, over recent years, CSL’s rate of growth in dividends per share (DPS) and earnings per share (EPS) has been declining.

CSL has long been viewed as a growth stock and under such a banner, if it still fits, can sustain a high PE ratio. But it also carries the tag of being a defensive stock and if the All Ordinaries gathers some steam from current levels, the defensive tag may weigh down CSL relative to other stocks.

From a technical analysis charting perspective, CSL’s current price situation relative to its past share price movements provides textbook material from which investors can learn aplenty. Let’s see how this one plays out.

Gary Stone is the Founder and Managing Director of Share Wealth Systems.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances

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