Chart of the week: are ailing UK banks poised to rebound?

by John Burford from interactive investor |

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High-street bank share prices could be at their lowest points, according to our chartist.

Let’s face it, bullish sentiment towards the banks is on the floor – as are their share prices. And that, in a nutshell, is how markets work.  

Bear trends start from extreme bullishness and bull trends from extreme bearishness. Today, bearishness is extreme. I will let you draw your own conclusions from that observation!

Yes, taking a highly contrary position from the majority involves considerable intestinal fortitude – but that is the fate of those who desire to succeed.

The HSBC (LSE:HSBA) share price has now reached an historic point. The current bear phase started from January 2018 at £8 and the worsening outlook for banks drove the  price to the current £3 area for a loss of a Fibonacci 62% (5/8).  

Source: interactive investor. Past performance is not a guide to future performance.

But that level brings it back to the two other major lows in 1998 and 2009. That represents major long-term support. But note that these major lows are eleven years apart.  

Is this a coincidence? We have at least one other eleven-year cycle in nature – the sunspot cycle (currently at a minimum).

Recently, I have referred to the equinox effect, where some markets seem to be ruled by annual motions of the earth around the sun. And because it is our sun that gives us all life (and hence the markets), is it a total stretch to believe the cycles of our sun (and earth) is a major influence on markets?

To determine if the short-term charts align with a bullish view, here is the daily:

Source: interactive investor. Past performance is not a guide to future performance.

As the market moved down to the current £3 area, selling momentum weakened – and buyers slowly took over. This has created a mammoth momentum divergence. Coming at the end of a sustained bear trend, this indicates a likely selling climax.

Odds are very high a major low is here or very close. A sharp move up this week would indicate a likely move up to my first target around the £4.50 region. Only a hard break into new lows below £2.80 would amend my stance.

Another candidate for a surprise rally phase is Lloyds. I August I suggested a major low was at hand for the bank. The share price pattern has been similar to HSBC:

Source: interactive investor. Past performance is not a guide to future performance.

In my August article I suggested the low at the time should be the final fifth wave low, but allowed for one more new low. I wrote: “If there is more downside first, I do not see much potential for large losses.  In fact, trading under the current 29p mark would set up an even better opportunity.”

In fact, it did make one more new low to the 24p mark and then reversed strongly.  An advance above the minor blue trendline should ensure a move up to test the wave four high at 38p. We shall see.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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