Chart of the week: A bank share flashing warning signs

HSBC hits my upside target at £7.70

With the general bullish enthusiasm for all investments Asian (and especially Chinese), HSBC Holdings plc has had a superb run of late. After all, the H stands for Hong Kong and S for Shanghai! It has been a leading bank in the region for a very long time – and China remains hot.

But this bullish performance has been at odds with the other UK-based banking group, Lloyds (and, dare I say, Barclays) whose share weakness I observed in my COTW of 29 August.

I believe this divergence, which has existed for some time, is coming to an end and it will be HSBC that joins the other banks in the bear market that is underway in the major banks. Here, I will present my evidence for this view based on the chart patterns.

Do you remember 2006? That was when HSBC topped out at £9 a share and then began a horrendous bear market that culminated in March 2009 at the £2.70 low. That was during the bank debt crisis, of course, when the run on Northern Rock sent bank shares sharply lower.

But my point is that HSBC peaked a full eight months before the FTSE 100 index topped in July 2007. And Barclays made its top in February 2007, with Lloyds topping in March, and both were already heading south as the FTSE topped in July.

It makes perfect sense to expect banks to lead the general market down in a period of deflation (a decline in money and credit) and, if history is any guide (as it usually is), they will lead the upcoming Big One down.

I believe HSBC is now about to turn down in a major bear trend. Here is the very long-term monthly chart, and there are two remarkable alignments on it:

I have drawn in the pink straight line connecting the major highs of 2001 and 2006 and simply extended it. Lo and behold, it just touches the recent £7.70 high with extreme accuracy! That is a magnificent 16-year line of resistance. Who says markets don't have memories?

Not only that, but the yellow zone covers the previous major highs since 2013 and, as I extended it, it also passes through the £7.70 high. That makes the £7.70 area a zone of very high resistance.

So, what are the odds of the market making a major turn down here? After all, the market could extend past the £7.70 level in a show of strength. But it would take an enormous amount of buying power to do it. Much buying power has already been spent in getting the market to climb from £2.70 to the current £7.70 area.

Let's zoom in on the weekly chart showing the latest rally phase off the April 2016 low:

I can draw an excellent Wedge pattern within which is a five-up with a long and strong wave 3 and a momentum divergence into wave 5. The top of wave 5 lines up perfectly with the upper wedge line at £7.70. Is this a coincidence?

If I had sat down in February when the wave 3 high was being put in, I could not have come up with a more accurate target for wave 5. Just extending the upper wedge line and where it met the pink and yellow extensions in the top chart would give me the £7.70 target! This is a triple whammy for the bull.

Putting all of this together, it appears we are at or very near a major high. A clear break of the lower Wedge line at around the £7.20 level should confirm. If this occurs, my first target will be the wave 4 low at the £6.40 area.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.