More Downside For The Banks

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

[Note: The chart above and analysis below refer to the ASX Financials ex-REITs sector index, the XXJ. Given the significant net market cap weighting of Commonwealth Bank ((CBA)), Westpac ((WBC)), National Bank ((NAB)) and ANZ Bank ((ANZ)) within the XXJ, this sector index acts as a proxy for Australia's Big Four majors, or as we tend to say in Australian stock market parlance, "the banks" – Ed]

Bottom Line 17/09/14

Daily Trend: Neutral
Weekly Trend: Up
Monthly Trend: Up
Support levels: 7024 / 6797 / 6430
Resistance levels: 7460 / 7883

Technical Discussion

Our headline last month was “Short term weakness anticipated” and although that was the case buyers once again stepped in to support price.  The end result was yet another significant high being locked in.  However, the sell-off over the past week or so has been strong, albeit only over the shorter time frame.  A decline of just over 5% in a couple of weeks is about as bad as it’s been for the Banking sector over recent times.  A very similar thing occurred at the end of July so there’s no reason to be hitting the panic buttons quite yet but there is room for further weakness over the coming weeks.  We’ll discuss further in the technical section below.  One reason for the current pull-back is likely overseas investors pulling out of higher yielding stocks.  There are growing concerns regarding [Australian] interest rates which may well need to be cut again.  This in turn means foreign investors will have exposure to currency weakness.  The end result is that the likes of Telstra and the big banks are coming under pressure.

Reasons to be aligned to the Sector longer term:
→ Interest rates should remain lower for longer due to recent inflation data.
→ The Banking Sector continues to be the driving force behind broader market strength.
→ The longer term trend is exceptionally strong.

The bearish divergence on the weekly time frame we’ve been harping on about for what seems like an eternity is finally proving to be significant.  It’s also triggered on the XJO though in this instance our oscillator is well on its way to hitting the oversold position.  In fact it’s around two thirds of the way to doing just that.  At the present rate of knots a couple of weeks could be all it takes for the divergence to be a thing of the past.  Back to the chart shows that the XXJ is sitting pretty much where it was back in May 2013 with a sideways consolidation taking hold.  The minor line of support was breached today by the slimmest of margins which paves the way for price to rotate down toward our target zone.  The target is simply the 50% – 61.8% retracement zone of the prior leg.  As long as the lower boundary at 6797 isn’t penetrated the bullish longer term case remains intact.  If it is breached a more substantial retracement is going to take hold, with the low made in February around 6400 being the next target.  One thing we have to remember is that it’s been an almost straight line rise since 2012 meaning a more significant retracement is not only feasible but also healthy.  First of all let’s see how price reacts over the next few days and whether buyers step in around this minor line of support.

Trading Strategy

Until the bearish divergence unwinds we need to be very sceptical of any short term bounce, especially if it’s coupled with decreasing volume.  On the positive side of things recent weakness has been coupled with relatively low volume which is another reason why we shouldn’t be overly concerned in regard to something much more sinister unfolding.  Should today’s low be overcome the typical retracement zone as shown should be the next port of call, possibly presenting a buying opportunity though we’ll discuss that in more detail nearer the time. 
 

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

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