Chart of the week: why I’m buying banks again
Have banks now made their lows and are poised for a decent rally phase? Our analyst gives his view.
6th July 2020 12:02
by John Burford from interactive investor
Have banks now made their lows and are poised for a decent rally phase? Our analyst gives his view.
Has HSBC reached its nadir and now poised to rally?
As long-time readers of mine well know, I have been relentlessly bearish on the banking sector for many months (and a few years!). But just as day always follows night, a bear trend always transforms into the opposite trend at some stage. I am asking the question – have banks now reached their lows are they poised for a decent rally phase?
There is little question sentiment towards the banks is hugely negative. For one thing, the pandemic recession seen by many is set to get a whole lot worse into the winter. Then, predictions of swathes of layoffs abound when the furlough schemes taper off in a few weeks. That is when house repossessions will spike as mortgage payments will be missed.
That is the usual narrative for the UK.
And HSBC (LSE:HSBA), with its strong connection to Hong Kong, is extra vulnerable with China now appearing to want to absorb it into its clutches. Forecasts for a severe weakening of HK as a major financial centre are thick on the ground. The outlook for the bank appears bleak indeed.
And that is why I am making a case for the shares as a strong buy. Remember, markets make lows not when confidence is high, but when all seems lost.
Here is the daily chart:
Source: interactive investor. Past performance is not a guide to future performance.
The slide off the 2019 highs around £6.80 has been relentless, and when news of the pandemic hit the headlines in March, a huge breakaway gap opened up. But the pattern to note is that, in the last few weeks, the mini-waves have been highly overlapping and are forming a possible Head and Shoulders reversal.
This pattern is well known to chartists, but a genuine instance must also feature a good momentum divergence at the Head compared with that at the Left Shoulder.
And the huge momentum divergence at the ‘Head’ at the £3.70 low on 1 June portends a major rally phase ahead – provided the blue neckline can be penetrated. If so, that would be a major buy signal.
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In its favour is the advancing bond yields (see my COTW of 15 June) that will boost returns from loans in a very big way if yields do advance, as I judge likely. This is, of course, highly unanticipated by most pundits!
My first target is at the £4.50 region with higher potential.
Monday morning Flash – The shares opened sharply higher this morning on a gap.
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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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