The traditional UK banks’ charts (Lloyds, Barclays, HSBC) have been diverging for a while. Lloyds and Barclays have been in major downtrends while HSBC remains in a solid uptrend. Members of my Pro Shares Club are short the first two and I am now looking at a short trade in HSBC to make a full set.
One major difference between them is that HSBC does a lot of business in Asia, while the other two do not. Many say that this Asian Connection accounts for the relative over-performance of HSBC.
Not only do I trade the individual shares as regular campaigns, but I always keep a close eye on the banking sector because with the central banks’ financialization of advanced global economies, including that of the UK, I believe when the Great Asset Mania (aka the Great Debt Bubble) starting from the 1930s finally turns tail, it will be lead down by the banking and financial sectors. That is because we will be in a deflationary scenario.
Remember 2006? That was when HSBC topped out at £9 a share and then began a horrendous bear market that culminated in March 2009 at the £2.70 low. That was the Debt Crisis, of course.
But my point is that HSBC topped out a full eight months before the FTSE 100 index topped in July 2007. And Barclays made its top in February 2007 and was already heading south as the FTSE topped in July.
It makes perfect sense to expect banks to lead the general market down in a period of deflation – and if history is any guide (as it usually is) – they will lead the upcoming Big One down. Does that mean the FTSE is about to top out anytime soon? That is not likely as last time, there was a span of several months between the banks’ tops and the FTSE’s.
But I will be using the banks as an Early Warning System for pinpointing The Top in the FTSE.
I believe HSBC is now about to turn down. Here is the very long term monthly chart and there are two remarkable alignments on it:
I have drawn in the straight line connecting the major highs of 2001 and 2006 and simply extended it. Lo and behold, it just touches the recent £7.70 high with extreme accuracy! That is a 16-year line of resistance. Who says markets don’t have memories?
Not only that, but the yellow zone covers the previous highs since 2013 and as I extended it, it also passes through the £7.70 high. That makes the £7.70 area a zone of very high resistance.
So what are the odds of the market making a major turn down here? After all, the market could extend past the £7.70 level in a show of strength. But it would take an enormous amount of buying power to do it. Much buying power has been spent in getting the market to climb from £2.70 to the current £7.70 area.
Let’s zoom in on the weekly chart showing the latest rally phase:
I can draw an excellent Wedge pattern within which is a five up with a long and strong wave 3 and a mom div into wave 5. The top of wave 5 lines up perfectly with the upper wedge line at £7.70.
If I had sat down in February when wave 3 was put in, I could not have come up with a more accurate target for wave 5. Just extending the upper wedge line and where it met the pink and yellow extensions in the top chart would give me the £7.70 target!
Putting all of this together, it appears we are at or very near a major high. A clear break of the lower Wedge line at around the £7.20 level should confirm. If this occurs, my first target will be the wave 4 low at the £6.40 area.
As you know, I like kisses. And we have an excellent current example in the Dow.
The story so far: The Dow has been in an 8 1/2 year bull run and many observers are getting impatient for its end which they say will be devastating. North Korea now has an ICBM (so they say) and appears ready to deploy it if you believe the headlines. Also, there is zero chance for a smooth US budget deficit increase with the deep divisions in Congress, so they say.
And Trump’s tax cut plan will also be dead on arrival – so goes conventional wisdom. And stock valuations are at levels last seen in 1929 just before the Wall Street Crash.
So what lunatics are buying shares at these levels? Good question.
If you read Jesse Livermore’s classic Confessions of a Stock Operator (and you should!), his strategy when considering whether to buy a share was to test his idea by putting out sample orders. If his order was absorbed with little change in the price, he knew that there were plenty of sellers at that price level – and quickly exited his position.
But if his order made the price move up, he knew that there were few sellers – and even small buy orders would likely push the price even higher. He therefore bought a lot more.
Of course, with today’s huge liquid markets, this is not possible except for small cap shares on AIM. But we can get an idea of how a market can absorb selling pressure
Yesterday was Labor Day in the US where main markets were closed and it was the less liquid overseas markets that reacted to the weekend North Korea H-Bomb news. Naturally, this produced some selling pressure, but what we needed to know was how the market would absorb it. Would the market crash or hold up well?
Here is the 4-hr chart
The blue tramlines are my long-term support/resistance lines with the 8 August high being wave 3 of 5. The decline is a clear A-B-C to the wave 4 low at the lower tramline. And the rally off wave 4 is wave 5 which will terminate above wave 3 high. The form of the waves in this rally appears to be in a series of 1-2s.
When the market touched the pink trendline on 30 August, it backed off this line of resistance, as is normal. Then the market surged above it to confirm the trend was up. But on Monday, the North Korea news hit the wires and in Asia, it fell in a gap – but right to the pink trendline support. Was that a coincidence? For a potential global nuclear war, this is a mighty weak response to that threat.
To me, it is demonstrating the innate strength of the bull trend.
And today, the market is back in rally mode and has left a kiss on the line of support which is a point where long trades could have been taken at very low risk (using tight stops).
So if my analysis is correct, we can expect the rally to continue, although one more dip is possible.
We are holding positions in several markets that appear on the verge of bursting in our direction. I am tracking the US Grains (Wheat, Corn and Soybeans) where the profit potential is huge. I am now offering a two-week Free Trial for you to test my service and see if it fits in with your goals. Details here.