One final push after correction

THE financial sector has been basking in its strongest growth after the Covid-19 sell-down in March 2020. The rise of the S&P Financials index is courtesy of large inflows to the banking sector after the Fed renewed quantitative easing. Interest rates heading lower boosted banks. Stock prices were further bumped up by banks' aggressive share buybacks.

After dividend caps were lifted in June 2021 for US banks, financial stocks, however, soon corrected.

This was on the back of looming inflation concerns. Does this signify a new bearish downtrend, or a mere passing correction?

We believe that the underlying strength of the index is intact and its bullish trend will be maintained from the longer term perspective as the Fed has said it will not change its policy stance for the foreseeable future. Other than holding interest rates constant, this means that the Fed will keep purchasing assets.

From the technical point of view, our weekly wave analysis indicates that after the index completed a larger expanded corrective flat between December 2017 and March 2020, it has formed a larger primary wave ((4)) (Primary phase markings are marked with two brackets) corrective wave. Which means to say, in the rebound from June 2020 onwards, upside target towards 730 region is the final wave ((5)) of the primary phase.

The sub-wave count in weekly charts also indicates that the bullish move is not over. First, waves (1)-(3) of the intermediate phase were completed after wave (3) achieved its minimum target of 161.8 per cent expansion of waves (1)-(2). Although the correction of wave (4) is likely to happen, will the index retrace to its support zone 1 or into a deeper support zone 2?

Daily charts with the Ichimoku (second graphic) provide a clearer projection. Looking at the period between April and May 2021, the Ichimoku's bearish divergence pre-warns a correction. Although a sell-off in mid-May broke below the uptrend line which indicated that the short-term bullish trend was over and there was a bullish rebound after the formation of a tweezer bottom at support zone 1 at 578.58-583.03, the rebound remains weak. Prices have been hovering below the resistance zone 1 at 617.30-623.90. Although there remains a possibility of upside surprise above resistance zone 1, the S&P Financials index is unlikely to cross the hurdle of resistance zone 2, at 633.49-640.74.

Furthermore, the Ichimoku shows signs of ranging. Momentum weakness after Senkou Span A and Span B has flattened out. The lagging span (in black) is trending below the candles while the latest candles are trending within the Kumo, which signals "turbulence" and confusion. All in all, the bull in the short-term is taking a break and recharging at a lower support zone. Once it manages to gather strength, the upside will be formidable.

• The writer is technical analyst at Phillip Securities Research

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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