Trade Idea: ASX

The ASX financial sub-sector has seen a strong 7.5% rally from the 10 June low and in the process has retraced nearly 50% of the losses seen between April to June.

Australia
Source: Bloomberg

Momentum and trend indicators suggest pullbacks will be contained. However, I would be keen to watch price action in the index with APRA announcing an increase in mortgage risk weighting for banks to ‘at least 25%’. I would expect traders to use any pullbacks in the banks as a buying opportunity as the amount of capital that banks will need to raise is not huge.

In fact, for me, the bigger driver continues to be falling volatility. As implied volatility in global equity markets (notably Australia) falls, so traders will look at banks for income and yield. There is actually a fairly strong inverse correlation between the ASX volatility index and the financial sub-sector, so volatility is key.

In my opinion, I would wait for the opportunity to present itself and therefore look to buy pullbacks into the 20-day moving average at 6,494, or on an upside break of the neckline of the inverse head and shoulders at 6620. On this development, of the complete head and shoulder pattern I feel the financial sector could target 7% upside.

 

Click to enlarge

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.