Chart of the week: is there an opportunity in the Credit Suisse fallout?

by John Burford from interactive investor |

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The latest markdown could be a great buying opportunity - or buyers may be catching a falling knife.

Major Swiss bank Credit Suisse (SIX:CSGN) is being caught up in the recent well-publicised Archegos hedge fund affair, which imploded spectacularly to land the bank with multi-billion dollar losses (and counting).

The continuing fall-out from this sad tale is the departure of several top risk management officials – and a severe markdown in the share price by a quarter.

There may well be other highly leveraged hedge funds lurking out there that could expose major banks to additional huge losses.

Whenever there is a bank crisis, it is typically when they become over-leveraged, such as in the US Savings and Loan Crisis from 1985–1995, which decimated bank shares at the time. 

I like to think that bankers aren't stupid, but some of them have their moments. A common flaw is having an infinite variety of creative ways to lose money at certain times.

So does this markdown present a great buying opportunity, or will buyers be catching a falling knife?

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

This is the long-term chart and shows the all-time high at the March 2020 coronavirus crash low at the 6 CHF mark. 

Since then it has taken part in the general stock market rally to reach the February high at 13.50 CHF.

Note the large momentum divergence at the all-time low and the break above the major trend-line off the August 2015 high. Both are potentially bullish signs.

With the Archegos revelations, the shares have sunk back to kiss this trend-line and make a Fibonacci 50% retrace of the rally off the 'c' wave low. Both events are potentially major support areas that should lead to a resumption of the uptrend.

But note the form of the rally off the 'c' wave low – it is in a three and that is potentially bearish as threes are corrective to the main trend. But on balance, with other bank shares in uptrends (see my latest bullish coverage of Lloyds and Barclays), we should have a tailwind behind Credit Suisse for support.

If the rally can be maintained, I have a major target in the 18 CHF region with higher potential (latest trade 9.80 CHF). Only a decline below 8 CHF would send me back to the drawing board. I am adding it to my ‘buy low, sell high’ list.

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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