Aussie Banks: Due A Bounce

Technicals | Jun 22 2022

Bottom Line 21/06/22

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support levels: 6025 / 4005
Resistance levels:  7758 – 7858 / 8419 (all-time high)

Note: All prices refer to the ASX200 bank sector index (XXJ).

Technical Discussion

Reasons to be bullish longer term (caution short-term):
→ Most analysts state that Australian banks will benefit from RBA rate increases.
→ The Russia/Ukraine conflict could put more pressure on inflation.
→ Benefits from rising RBA rates are being offset by cost pressures and inflation.
→ APRA no longer requires banks to hold a minimum level of earnings retention.
→ Rejecting hard from all-time highs/resistance.

It would be fair to say that the banks haven’t been the best performers over the past few weeks. Off the highs made in April this year, the Banking Sector has declined by over 20% to the recent low made a few days ago. It’s not so much the retracement that’s concerning but the way in which it’s unfolded. The past couple of weeks has been especially weak, with parabolic price action being the main theme. The big four look severely oversold over the short-term so it wouldn’t come as a big surprise to see a bounce. Today could be the start of a short rally but we can’t read too much into one day’s price action. The clue will be in how strength unfolds and whether it’s choppy and messy or impulsive in nature. Either way, it’s difficult to envisage a “V” shaped reversal unfolding right here and now.

In many ways, this is a similar looking chart to the XJO. The main reason is that the recent leg higher failed to hit the target area. In this instance, it terminated at the lower boundary of a multi-year zone of resistance. What it’s left is a truncated wave-(v) which in turn completes a larger degree wave-1. A truncated wave is one that fails to run to its full potential. They are quite a rare pattern but have been cropping up on the charts more recently. Either way, a 5-wave move off the March 2020 lows appears to be locked in.

One thing we need to be aware of is that the retracement from the high of wave-1 isn’t textbook. As can be seen, the speed of the pull-back over the past couple of weeks has taken the XXJ within touching distance of the typical retracement zone. Again, the speed of the retracement is our main concern. A corrective pattern within wave-2 should be corrective in nature. It isn’t a guideline that’s been adhered to. If the patterns are to prove themselves, we’ll need today’s strength to continue over the next couple of weeks or so. It would open the door for another leg lower into the 50% – 61.8% retracement zone. The end result would be a more symmetrical 3-wave pattern. A straight-line leg down into the target area would be a reason for concern and open the door for something more sinister to unfold.

Trading Strategy

Although it may be tempting to jump on due to the oversold state of the banks, caution is required. If we are correct, a bounce only is likely going to unfold. The bottom line is that symmetry is now lacking which is a reason in itself to stand aside. Clarity will return, as it always does but some patience is going to be required. It’s a sector to stand aside from for us at the moment.

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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