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I can hear the cynics say – yes, you have a rightful place – that they could have told me there was money to be made in banks weeks ago. And they were right. You could have made money in the recent run up.
But what I mean by my headline is that there could be another possible buy opportunity with a manageable risk.
Let’s look at a chart of the Finance sector:
click to enlarge
This is a plain vanilla line chart with shaded areas that represent previous levels for banks over the last four years. So banks are now only back to the levels of two years ago and in the meantime had you being buying for the long-term, your investment would have been under water for the last two years. It is only now that you have broken even, taking into account dividends and holding costs etc.
You will note that these are the same levels we saw three and four years ago (also shaded yellow) when the big slide started.
So why do I think there is a manageable opportunity ahead? Well let’s go to Elliott:
click to enlarge
I see a scenario of an orderly retreat to 4200/4300 levels and to be satisfied with this retreat I will be watching the oscillator to see that it not only comes back to zero but that it holds at a level of no less than -10% on the index. I will explain that in more detail when and if this occurs. But we could potentially see a classic Elliott wave five trade – the least risky of all.
You will note the pullback is scheduled for around mid-September, so we have time to wait and watch for it to emerge.
If the oscillator holds around the baseline, then this would be a good time to buy into the banks for the next move higher, which will be to around 4700/4800. The index could go higher than this but predicting a higher level at this stage would display over-confidence.
Would this be a long-term buy? We will have to answer that question closer to the time.
The world banking uncertainty is still not over. It could take years to fully recover and even with a good move in the coming months, banks are still well off their major highs and many investors are still out of pocket:
click to enlarge
We are not in a bull market and so we need to tread carefully. But I do like what I see ahead and will track it closely. I may even take some positions myself.
I promise to keep you updated.
Enjoy the ride
Tom Scollon |