German banking giant Deutsche Bank AG (DB) got a reprieve from its long and volatile downtrend last week, joining U.S. bank stocks in a momentum-fueled rally after the presidential election triggered a worldwide bond selloff. While the stock is unlikely to enter a new uptrend anytime soon, the location of the bounce is significant, perhaps signaling a long-term bottom.
DB troubles reflect internal structural issues and slowing growth prospects in Europe, despite years of ECB intervention. Ironically, the inflationary surge could undermine central bank policies and make things worse in that part of the world, but a steeping yield curve will help local banks due to a widening spread between the rates they pay to hold cash and the fees charged to customers.
DB Long-term Chart (2002-2016)
The stock has been trading on the NYSE since the 1990s, making it one of the oldest ADRs in existence. It carved a 4-year expanding wedge pattern between $35 and $98, bottoming out in October 2002 and entering an uptrend that reached the prior high in 2004. That peak gave way to two years of sideways action into a 2006 breakout that continued into the May 2007 high at $159.76, which also marks the all-time high.
The bottom dropped out during the 2008 economic collapse, dumping the stock through 2003 support into the low 20s, marking the lowest low since it came public on this side of the Atlantic. The subsequent recovery wave stalled just seven months after it began, topping out in October 2009 below the 50% selloff retracement level, with that peak marking the highest high in the last seven years.
It entered a massive downtrend in 2010 but selling pressure didn’t increase until 2011 when it’s fell from the mid-50s into upper 20s (blue line) in less than two months. The stock bounced strongly, stalled out and tested the low one year later, posting a double bottom reversal that many thought would signal a new uptrend. However, the rally failed to pierce the lower 50s, keeping the long string of lower highs intact, ahead of a 2015 test that triggered a major breakdown.
DB Short-term Chart (2014 – 2016)
The downtrend eased into a narrow descending channel at the start of 2016, continuing into the September all-time low at 11.19, ahead of a modest recovery wave into the fourth quarter. Buying pressure picked up after the election, lifting the stock into the declining 200-day EMA, which signals major resistance. It’s likely the rally will pause at or near this level in coming weeks and test it into the first quarter of 2017.
On Balance Volume (OBV) has limited value because the company trades in other venues but may offer clues about current buying interest. It entered a steep decline in 2014, with distribution continuing into the fourth quarter of that year. The indicator matched 2015 sideways price action and turned sharply lower in 2016 when the channel set into motion. It’s gained considerable ground since the election in a surge that could signal a long-term bottom.
A major inflection point will come when the rally lifts into a test of the 2009 bear market low near $20. Channeled price action started when that support level broke in January 2016, and a surge above new resistance would signal a major bull victory that could quicken the upside pace. In turn, that may presage a more vertical advance that reaches the next major barrier in the low 30s.
The Bottom Line
Deutsche Bank has rallied with U.S. banks in reaction to falling bond prices and higher yields, perhaps signaling a long-term bottom. However, it may take months to confirm this bullish thesis, which requires even stronger accumulation and a rally into the 20s.
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