ANZ - yield attractive but charts suggest caution

ANZ -  yield attractive but charts suggest caution

The big Australian banks have attracted considerable support in recent months as yield hungry investors seek alternatives to declining term deposit rates.

While many would argue that 5.6% is still an attractive yield in the current environment, markets rarely head in one direction without price corrections along the way. ANZ has now arrived at a significant resistance level and has the potential for a Bollinger Band sell set up. After rising 27% since May, we could see a decent downward correction if there is a sell set up in the near future

The potential Bollinger Band set up is a double top or "M" reversal. This involves the first peak in the M being made above the upper Bollinger Band (blue line) but the 2nd peak being made under it.

This behaviour indicates strong trend momentum at the first peak but weaker momentum at the 2nd. The logic of the setup is that declining momentum often precedes a reversal of trend and so gives traders an early entry on a potential new trend.

As you can see from the daily chart below, we now have the possibility to make a peak under the upper band following the recent one above the band. If this doesn't happen there will be no set up under this strategy.

A typical entry strategy would be to sell on the first close below the low of any candle making a trend peak below the upper band. The initial stop would be placed above the trend peak.

ANZ CFD - Daily. Source CMC Tracker

There are other technical pointers to a trend peak here being the beginning of a significant corrective decline and not just a minor peak in the ongoing uptrend. One is that the rally since the low in May has been in the form of a 5 swing advance. Once the 5th swing is completed there is a good possibility of the whole move since May being corrected.

The last swing up from the low marked with a black "4" has also been in 5 swings. So a trend peak here would fit with the scenario of a potential end to the major 5 swing advance.

The weekly chart below, adds to the possible significance of this level.

  • We are at the resistance formed by the major peaks in April 2010 and February 2011 (dashed lines).
  • The fast stochastic in the box under the chart is very over bought
  • There is a possible Bollinger Band M reversal on the weekly chart (peak above the upper band followed by peak under it). Although this doesn't look like a double top or "M" pattern, one of the advantages of Bollinger Bands in this situation is to alert traders to the fact that there is potentially a declining momentum/retest situation in play even when the chart doesn't look that way to the naked eye.

    ANZ CFD - Weekly. Source: CMC Tracker

If there is a setup here I'll post follow up thoughts on approaches to profit targets and moving the stop loss.