A Double Top for CBA’s Share Price?

What happened to the market yesterday? After starting the day on a positive footing, the ASX200 lost ground, with the selling pressure picking up in the afternoon. China and the banks were the culprits.

But it’s the banks that contributed to the bulk of yesterday’s selling. Investors are again asking, have the banks seen their best days?

We’ve been pondering this same question in the reports we send to Sound Money. Sound Investments subscribers. Specifically, we’ve been asking when the interest rate sugar fix will wear off on interest rate sensitive sectors like housing and the banks. Because when it does, asset prices will head south.

We hope our readers won’t mind if we share a few charts with you to show you what’s going on. Firstly, our premise is that the Reserve Bank of Australia’s rate cutting cycle, which saw the cash rate fall from 4.75% in October 2011 to 2.5% in August 2013, boosted all asset markets. Importantly though, we contend that the boost was temporary.

Here are two charts that support our contention. Firstly, there’s Mortgage Choice [ASX:MOC], Australia’s largest listed mortgage broker. It peaked in October last year and is now starting to trend lower. This chart tells you that the housing boom could be over.

Mortgage Choice’s best day are behind it

Mortgage Choice [ASX:MOC] Price chart
click to enlarge

The next chart is slightly more complex. It’s representative of Australia’s finance based economy and provides important clues as to what’s going on in the economy.

It’s a chart of the Commonwealth Bank [ASX:CBA], Australia’s largest bank. It’s a weekly chart (which helps to cut out lot of the noise that occurs with daily volatility) spanning the past two years. On Tuesday it attempted to breach its October high, only to sell off immediately. While the stock looks like it’s in a solid uptrend, there are some ‘internal’ warning signs.

Here’s what we wrote to our subscribers last week:

‘..if you look at the price chart of the CBA below, you see a stock price in a strong uptrend making an attempt at the old highs. But if you look below the share price, you can see some warning signs. Both the relative strength index and the MACD index have trended lower over the past year, and volumes (the lower panel) have really dropped off with this latest rally. That’s not an encouraging sign.

‘This has all the makings of a double top. Let’s see what happens in the next few weeks, but if Australia’s financial bellwether can’t sustain new highs, then I doubt that the market can either.’

Double top for Commonwealth Bank?

Chart of the Commonwealth Bank [ASX:CBA]
click to enlarge

Was Tuesday a ‘double top’ moment? We don’t really know, but CBA’s share price performance isn’t exactly encouraging.


Greg Canavan+
for The Markets and Money Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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