SG Stock Focus Yangzijiang may see corrective decline after overextended up move

Since the start of 2017, Yangzijiang Shipbuilding had risen from the “ashes like a phoenix” and staged a magnificent rally of 88% that outperformed both the local and region benchmark FTSE Strait Times and MSCI Asia ex Japan Indexes by a wide margin (refer to chart 1).

The recent rally in its share price has been backed by improving fundamental factors such as a recovery in the global shipping industry where the global orderbook to fleet ratio has dropped to a low of less than 10% which implies that supply is likely to come in lower from 2018 onwards.

In addition, the Baltic Dry Index which is used as gauge to measure demand for shipping capacity has risen from a record low of 290 seen in February 2016 to 1338 in April 2017. The current level is now at 1222 (as at 23 Aug 2017 based on Bloomberg data). Thus, these are clear signs that the global shipping industry has started to see some light at the end of a dark tunnel after being in doldrums for years. Yangzijiang Shipbuilding is now ranked the fourth largest shipyard globally and number one in China by orderbook , thus it is well positioned to reap the benefits of this on-going global shipping recovery due to its operational efficiency and sound balance sheet.

Let’s us now examine Yangzijiang Shipbuilding from a technical analysis perspective.

Chart 1 –Yangzijiang Shipbuilding share price performances since start of 2017

Medium-term technical outlook on Yangzijiang Shipbuilding (SGX: BS6)

Key technical elements

• The 130% rally from its 0.705 low printed in September 2016 has stalled at the upper boundary/resistance of a long-term “Expanding Wedge” in place since October 2011 low at 1.60/64 zone (see weekly chart).
• The weekly RSI oscillator has also reached an extreme overbought level of 81% since May 2015 which suggests limited upside momentum in price action at this juncture.
• The daily RSI oscillator has broken below its ascending trendline support which indicates that the upside momentum of the recent price action rally from 23 June 2017 low has started to abate. These observations suggest the risk of a medium-term corrective decline in price action at this juncture after an overextended rally in place since 23 June 2017 low (see daily chart).
• The next significant medium-term support now rests at the 1.31/27 zone which is defined by former swing high areas of Oct 2015/Jun 2017, the lower boundary of a medium-term ascending channel from 27 January 2017 low and the 38.2% Fibonacci retracement of the on-going medium-term up move in place since September 2016 low to the recent high of 10 August 2017.

Key levels (1 to 3 months)

Pivot (key resistance): 1.60/64

Supports: 1.43 & 1.31/27

Next resistance: 1.90

Conclusion

As long as the 1.60/64 key medium-term pivotal resistance is not surpassed, Yangzijiang Shipbuilding may see a corrective decline towards the intermediate support of 1.43 before targeting 1.31/27 medium-term support zone.

However, a clearance above 1.60/64 is likely to invalidate the corrective decline scenario for an extension of the current up move towards the next resistance at 1.90 (major swing high area of April 2011).

Charts are from eSignal

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