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Forget Basel, Financials Will Still Struggle: Charts

The term “as safe as a bank” has pretty much become an oxymoron since 2008, when the global financial crisis began. The "Basel III" announcements, already described as old generals fighting past wars, will unlikely do much to bring confidence back to the sector.

The BKX U.S. Banking index can be used as a measure of confidence in the US banking system. From a charting perspective, the trend signals caution because of its failure to establish a broadly supported uptrend.

The weekly chart is useful in capturing the broad relationship between long-term investors and shorter-term traders. The trend strength and sustainability is collectively shown by the red long-term group of averages. Wide separation shows trend strengths and sustainability, which can be seen in the 2008 downtrend period. Note exactly the trend strength you want unless you are short, but it shows how trend strength is identified.

This relationship does not exist in the recent chart activity. The uptrend breakout from around 40 to 60 was a weak rally. The retreat from near 60 has not been arrested with buying support from long term investors. The long term group of averages has remained compressed, indicating weak support for the sector. The compression does not show caution, rather, it signals a lack of confidence.

The details of support and resistance levels are used to show when confidence is replaced by fear, or by caution. A move below 40 is a move into fear territory with the next downside support below 35.

Caution is shown by a continuation of index activity between support and 40 and resistance near 50. This is a sideways trading band that has defined a directionless market for most of the past year. The upward rally was a blip and not a trend. This is indicated by the failure of the long-term group of averages to separate. The rally was driven by short-term trading enthusiasm and not by long term investor support.

A move above resistance near 50 signals cautious optimism but this cannot be turned into bullish trending until there are sustained weekly closes above 60. The long-term group of moving averages must also turn upwards and develop good separation.

The Basel III rules has been anticipated for months and the details of the announcement contained few surprises. The charts show further downward pressure to come.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy