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Banks hold the key - a quick spike lower?

Lesley Beath  |  19 Jul 2011Text size  Decrease  Increase  |  

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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

 

Reviewed this week

 

Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.


Overview

We entered last week with some encouraging signs on the Australian market. The All Ords had posted a weekly key reversal at the beginning of July and this was followed by a similar pattern in a number of sectors. This was viewed as a positive development, but as noted in the last report, there was doubt as to the short-term direction as action in the US and Europe posed a threat. The US and German markets were testing critical resistance levels and as this was coming from an overbought condition, there was risk of a short-term pause.

That anticipated pause has certainly come to pass, with the S&P 500 declining by 2% last week, and Germany falling by 2.6%. Our market suffered a 3.7% decline, with the Banks falling by a whopping 6%.

And whilst the possibility of a pause was highlighted last week, I had not anticipated such a dramatic reversal; especially in the Retail sector. The latter had been discussed in recent reports and it appeared that the bear market in the sector could be nearing an end. The Retail index had posted a weekly key reversal at the end of the prior week and I noted "it's too early to say that the bear market in this sector is complete and there is hefty resistance at current levels for David Jones (DJS) and JB Hi-Fi (JBH), but key reversals warrant attention and unless last week's lows are violated, risk in the short term has shifted to the upside".

Well we all know what happened last week, and I don't think that I was alone in being surprised by events. From a Technical viewpoint there is no evidence to suggest that the worst is over, although panic selling such as this often marks the end of a decline.

Information Technology also aborted its key reversal, with a 9% fall in Computershare (CPU). The stock was reviewed last week, and an Accumulate rating put forward. But the stop-loss has been triggered and at this stage, it is prudent to sit on the sidelines.

Without going into too much detail, it is sufficient to say that last week's action has aborted the improving profile on a number of sectors.

What is important now is whether or not the All Ords will violate critical support in the form of the June lows, and that is likely to be largely dependent on the action in the Banking sector.

The Banking index is now in close proximity to its July 2010 lows - if this support is violated I think we could see a quick spike lower, which could take the index down by another 7% (this would be a 50% retracement of the 2009-2010 rally).