All The Way With CBA?

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

Bottom Line 05/06/21

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support levels: $89.20 / $76.75 / $67.47 – $64.46 / $53.44
Resistance levels: N/A (all-time high)

Technical Discussion

Reasons to be more confident:
→ It is reported that the major banks have around $19.5bn – $28bn in excess capital.
→ A Conservative approach to capital management looks likely, especially as Covid risks remain.
→ A higher long-term return on equity likely due to lower funding costs.
→ The EPS upgrade cycle should support an earlier and stronger dividend recovery in 2021.
→ Broken higher out of a consolidation pattern.

The big four banks have remained sought-after over the past few weeks, with Commonwealth Bank ((CBA)) leading the way forward. First-half results have generally been better than those in recent years. Strong capital positions and healthy provisioning levels appear to have caught the eye of investors. According to many analysts, the banks are still trading below the long-term historical average. The bullish rhetoric has also been helped by the belief that balance sheet momentum will continue. There is also the possibility of buybacks or special dividends to consider. The bottom line is that the big four banks have been looking better fundamentally and technically.

Considering the above, it seems strange that the major brokers are less than enthusiastic. Generally, they have been slowly becoming more bullish although that stance seems to have changed more recently. Out of the 6 major brokers we follow, not one has put out a “buy” recommendation on CBA since the beginning of May. Not that they are bearish, with most holding a “neutral” stance. No doubt one of the reasons is that most have headed higher significantly over recent months. As we know, nothing goes up in a straight line indefinitely, albeit CBA has been trying to prove that theory incorrect recently.

If we are to see a retracement, now is as good a time as any for it to unfold. The reason being, price has hit the 1.618 projection of wave-(i). Although this is only our minimum expectation when seeing an extended leg it’s uncanny how many times a stock will stall at this key Fibonacci projection. Even if the trend runs out of steam there’s no reason to expect a significant decline though. If minor degree wave-v is going to lock in, it will only complete intermediate degree wave-(iii). It would allow for more of a sideways meander as opposed to an impulsive leg South. The best-case scenario would be to head straight up through the 1.618 projection without looking back. The further price gets up through that target, the greater the chance wave-(iii) will continue to substantially higher levels. I’m not going to make upside targets at this stage though. The company will need to prove itself before getting overly excited, albeit it’s doing a fine job thus far.

Trading Strategy

With CBA hitting a potential reversal zone we don’t want to be chasing it higher. Also, the straight-line leg higher doesn’t provide a low-risk entry. For around a decade now we’ve favoured Commonwealth Bank over the other big three. Nothing has changed. We’ll keep it on the watchlist but some patience will likely be required.

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).

This report may contain advice that has been prepared by The Chartist Pty Ltd (ABN 40 641 323 051). The Chartist Pty Ltd is a Corporate Authorised Representative (CAR No. 1282007) of Shartru Wealth Management Pty Ltd ABN 46 158 536 871, AFSL 422409. Any advice is considered general advice and has been prepared without taking into account your objectives, financial situation or needs. Because of that, before acting on this advice you should therefore consider the appropriateness of the advice having regard to your situation and your own objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. If the advice relates to the acquisition, or possible acquisition, of a product (other than a security e.g. a CFD) then the client should obtain the relevant Product Disclosure Document and consider it before making any decision about whether to acquire the product. Past performance is not a reliable indication of future performance. This material has been prepared based on information believed to be accurate at the time of publication. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information.

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms