My father grew skeptical of banks and what it represented. A man of the soil, he saw wealthy bankers getting filthy rich on farm foreclosures – one of the few industries, which managed to survive and thrive in those terrible times.
When our version of “The Depression” rattled markets in 2008, his insights reminded me it was time to pay closer attention to the banking sector.
What Lehman’s collapse did was essentially separate the banks with strong fundamentals from those that had none.
We used our charts and analyzed one specific bank: Hong Kong listed HSBC.
- The fatal drop below the long-term support area near 124.
- The second fatal failure of lower support near 112
- The pile driver patternwhich carried price to 96. This is an important level on the way down, and also on the way back up.
- The failure to move back above 124 which meant the collapse below the pile driver low of 96 was almost an inevitability.
It was the failure of support that defined the HSBC retreat and these areas will provide analysis for future rises. The lingering effects of the crash can still affect survivors even after the initial shock wears off.
The important chart pattern is the inverted head and shoulder pattern. This is a recovery pattern. It is seen in the DOW and in an increasing number of individual stocks. Although it is not as reliable as the up trend head and shoulder pattern, the inverted pattern still provides a good leading indication of trend change.
The key feature on the current chart is the potential uptrend line. It starts with the low of the head and shoulder pattern and uses the low of the right shoulder as the next anchor point for the trend line. Current activity is moving price towards the trend line. A rebound from the trend line value will confirm the reliability of the trend line and the continuation of the uptrend.
- Video: Banks Need Strong Capital Base
The recovery from the low near 30 to the current price near 86 has delivered a 186% profit. This is a bank that felt the effect of the global financial crisis but also prospered. Traders look for the same patterns of behavior in other banking stocks. These are the survivors that deliver capital growth and dividend income in the future.
If we join the trend how far can we expect it to rise? The answer takes us back to the inverted head and shoulder pattern and the historical support levels that signaled the failure of the up trend.
The depth of the head and shoulder pattern is measured and the value projected upwards. This gives an upside target near 96. Sound familiar?
This is also the support midlevel indicated by the pile driver low. The activity between 96 and the next support level at 112 includes a high level of volatility. This suggests traders could see a high level of volatility again as the market ranges in this consolidation area.
A break above 112 soon runs into long-term historical resistance near 124. The important message is that the fast run and the early easy capital gains have now slowed. The up trend will continue, but it faces more resistance barriers to the rate of capital appreciation will be slower. A move from 85 to 125 offers a 47% return but the price may take many months to achieve this target.
Traders who entered in the 40 to 60 area may consider applying zero cost averaging strategies to lock in capital gains and reduce the time risk involved with a sideways consolidation movement in price.
This is a money management strategy more effective than the “sell half” response to a rising trend. The strategy works in a rising market. Traders sell a number of shares from their position sufficient to recover the original capital outlay for the position.
If the position cost $10,000 to establish, the trader sells $10,000 worth of shares when the price increases by 100% or more. This strategy is most successful when the number of shares sold to recover capital is less than half the original position.
From a practical point of view, the trader has his original capital back. The remaining shares in the position cannot revert to a zero-dollar value unless the stock is suspended or delisted. This position will always show some profit, even if the stock price falls.
Zero cost averaging is an effective way to make capital work with low risk. This strategy is discussed in full in The 36 Strategies of the Chinese for Financial Traders.
It goes to show that with a proper chart analysis, you will be always be able to sift through and identify banks that have a solid footing from those which look set to follow Lehman's fate.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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