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Do You Buy On A Share Split?

12/11/13 12:40:09 PM
by Koos van der Merwe

Whenever a company announces a share split, my ears perk up.

Security:   NA-T
Position:   Accumulate

Companies usually announce a share split when their board feels that the share price is too high reducing market liquidity. When a company decides to split its shares, the share price usually falls, but the market will decide the final price. The lower share price is inclined to increase and broaden the share owner base and improve market liquidity. Trading volume increases, and the share price could rise. However, a company often announces a dividend increase at the same time, hoping that this will keep the share price stable.

On December 4, 2013 the National Bank of Canada announced a two-for-one share split by way of a share dividend. Would you buy shares hoping that when the share split occurs, the share price after the split will rise or remain the same because of the dividend announcement?

Figure 1. A daily chart of National Bank with an Elliott Wave count.
Graphic provided by: AdvancedGET.
The daily chart in Figure 1 with an Elliott Wave count suggests that the share price has further to fall in a WAVE 4 with a possible target of either $85.57 or $83.02. The probability ratio (PTI) is at 91%, which is strong. The RSI indicator is in an oversold position and could fall further. Note that volume increased as the price fell, a strong sign of weakness. Note also that the JM Internal band gave a sell signal on December 3, 2013 the day before National Bank made their announcement. The JM Internal Band indicator is a 15-period simple moving average offset by 2% positive and 2% negative. A move below the lower band suggests a sell.

Figure 2. A daily chart of National Bank.
Graphic provided by: Omnitrader..
The chart in Figure 2 is an Omnitrader chart showing how the share price gave a sell signal at $91.60 on November 7, 2013. The price continued higher to the upper external band, before falling to break through the Verve trailing stop. The Internal Band is suggesting support at $88.18 on the upper and $84.85 on the lower band. The RSI indicator and the TDI Jak indicator are still negative.

This is a share that I would place on my watch list. Its present yield is 3.89%. By increasing its dividend, the company is hoping to prevent its share price from falling after the split. With the Elliott Wave suggesting that the share price could start rising into a WAVE 5, buying the share just before or just after the split could be an advantage. This is a share that is definitely worth watching.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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