A Bounce For UBS

Posted by barkand on September 27, 2011 under Bollinger bands, Candlestick charts, Classic chart patterns | Be the First to Comment

UBS has been in the news recently due to its $2 billion trading loss by trader Kweku Adoboli. Meanwhile, its share price has tumbled 43% since touching $20 USD in the spring to finish last week at $11.25. But the revelation of the trading loss was not the cause of the crash. In fact, the warning signs first appeared six months ago.

Looking at a weekly chart of UBS shares, we see that a double-top formed with peaks in February and April of this year. Several pieces of evidence suggested that the market’s enthusiasm was much lower as the second peak formed. Volume was weak during the second run to $20, and a lower reading of RSI told us the market was becoming more uncertain. Also note that %b, like RSI, failed to reach the level at the earlier high.

The sharp drop in prices beginning in late July was not unique to UBS. Equity markets around the world suffered big losses, particularly bank stocks. And UBS still managed to underperform its peers during this time.

But we believe a tradable rally is underway. Last week’s price action traced out a beautiful “hammer” pattern in candlestick terms. And while prices did reach new lows, it was not a new low in %b, which can be a useful measure of momentum. We are looking for a bounce back to the $13.00 to $13.25 range, or approximately 15% up from last week’s close. If this bounce does occur it could be of the “dead cat” variety, however. The small “window” which formed a few weeks ago will function as an area of resistance. It may turn out to be only a pause in a longer down trend.