Oz Banks Remain Vulnerable

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ASX 200 Financial Sector ex Property Trusts (XXJ)

Bottom Line 28/05/13

Daily Trend: Down
Weekly Trend: Up
Monthly Trend: Up

Technical Analysis

We’re going to do something slightly different this evening and concentrate on the weekly time frame which shows some interesting patterns [for the Australian bank index].  The severity of the recent downturn, albeit only over the short term does suggest an interim top is in position with wave-(C) likely being locked in.  If that pivot high is overcome then we’ll have to reassess though for the moment sellers have certainly taken the upper hand.  From an Elliott point of view the most noticeable pattern is the 3-wave movement that commenced way back in early 2009.  Indeed, it would be difficult to get clearer patterns with a 5-leg movement completing wave-(A) which was corrected by a 3-wave retracement into wave-(B) which also terminated very close to the 61.8% retracement level. 

The price action from that juncture has undoubtedly been clean and strong in nature for the most part although the initial stages of the trend was anything but impulsive.  It was choppy and messy which means we can’t label it as a much more bullish wave-3.  One thing’s definite, a probe into the price territory of wave-(A) means overlap will have occurred which cements our count as being correct.  As can be seen those levels aren’t too far below making it likely that a larger corrective pattern has been the way forward.  Also note that the wave equality projection of that larger pattern was tagged very nicely indeed before the recent reversal started to unfold.  So right here and now there are several reasons suggesting that further weakness is going to be required before the longer term trend resumes.

The wave structures here don’t really align with those of the XJO [ASX 200] which still offer upside potential – unless our make or break point put forward on Friday is penetrated.  One would assume that the broader market is going to need the help of the Banking Sector if it’s to head into new high territory, especially considering its been the catalyst behind the strength of late.  That’s not to say that the Materials Sector can’t step up to the mark though it has to be said there’s little sign of strength within the XMJ at the present time.  And with China data still being reason for concern I’m not sure what the catalyst is going to be to get the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) heading north.  Anything’s possible though it’s difficult to see a substantial flip from financials into resources right here and now.  The other pattern of interest is Type-A bearish divergence which is evident on the weekly chart shown here; our oscillator is already more than halfway down into the oversold position.  In fact bearish divergence has been a common theme of late which just emphasises the fact that price, as well as trends got a little ahead of themselves.

Trading Strategy

If you’re holding stocks within the sector it may be prudent to tighten trailing stops, especially as the patterns portend to a deeper retracement unfolding over the coming months.  I’m not a great advocate of closing positions just for the sake of it so there is certainly no reason to stand on the sidelines watching and waiting.  And who knows, the patterns could deviate from those expected which would result in lost opportunity should this trend continue.  Just keep risk small and keep on top of the money management side of things.  Should the patterns evolve as anticipated we could be looking at some shorting opportunities a little later down the track though first of all we’d need to see a low volume counter trend move higher as this would be a confirming factor in the recent pivot high being significant.

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not FNArena's (see our disclaimer).

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