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.

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.


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