Westpac: Patience Required

This story features WESTPAC BANKING CORPORATION. For more info SHARE ANALYSIS: WBC

Westpac ((WBC))

Bottom Line 01/02/23

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $18.80
Resistance Levels: $27.12 / $30.44 / $35.39

Technical Discussion

Reasons to remain bullish long term (caution short-term):
→ Some analysts suspect the big four banks will provide their strongest pre-provision profit and growth in more than a decade.
→ Net interest margins are unlikely to peak until H2 this year.
→ Higher costs have been offset by higher net interest income and a lower bad debt outlook.
→ Interest rate leverage in the net interest margin was a highlight within results.
→ Consolidating following the recent leg higher.

We were asking the question last time as to whether a small consolidation pattern was about to complete. The answer is a categorical no. It’s not ideal as it means the lacklustre price action has continued for longer than would be deemed ideal at this stage of the trend. More on that below. Not that the lack of traction moves us to a bearish stance, yet it’s put the patterns under pressure. Either way, it’s now more important than ever the next significant move is to the upside. Several of the large brokers have become more sceptical about the medium to longer-term picture for the big four banks. It’s not a reason to be alarmed as first and foremost we are technical analysts. However, if you like combining fundamental and technical analysis it’s less than ideal.

As stated above, the continued sideways grind hasn’t done us any favours. This is especially true from an Elliott Wave perspective. Before we get into the smaller degree patterns let’s take a look at the larger ones. The good news is that they remain bullish for now. Waves-1 and-2 aren’t textbook but they show symmetry which is the next best thing. As can be seen, wave-2 terminated smack bang on the 61.8% retracement level. Not only that, but impulsive price action kicked in off those significant lows. Minor degree, waves-i and-ii are also in place. In stocks, wave-iii is usually the strongest of all the impulsive waves, but it hasn’t been the way forward – at least not yet. The initial thrust higher was fine but we can’t ignore the lack of traction over the past few weeks. It’s now putting serious pressure on the smaller degree patterns. It may be stating the obvious, but the smaller degree patterns make up the larger ones. In other words, if they start to take a different path, a red flag is immediately raised.

Ignoring the wave count for a moment leaves us with a consolidation phase that’s been unfolding since mid-October last year. In its own right is a bullish proposition as it’s forming following a decent leg higher. Nothing is guaranteed but price will normally break in the direction of the prior trend. However, with the stock sitting smack bang in the middle of the consolidation pattern there is still work to do before the upper boundary is overcome.

Trading Strategy

We initiated a long trade in Westpac in mid-October last year. Unfortunately, since that time price has meandered sideways with no conviction whatsoever. However, we’ll continue to hold and respect our protective stop at $20.00. It was already a low-risk entry so we can’t reduce the risk at this stage. A push above the upper boundary of the congestion pattern would allow us to amend the protective stop. In the meantime, more patience is required. 

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