[Click on the above picture to watch a comprehensive analysis of the past 20 years trading in the Financials Index using the theory of key bars. In it you will learn why the current rally is entering a danger zone where serious selling can re-emerge.]
The Financials Index [ASX:XFJ] in Australia has seen some serious weakness over the past few years. Property markets in Australia are rapidly coming off the boil so the engine room of bank profitability is slowing from its breakneck pace of the past decade.
With markets rallying strongly over the past few months on the back of a change of tune by the US Fed, is it time to buy the banks or is this an opportunity to offload them? Or even go short in preparation for the next leg down?
Answering questions such as these can be made a whole lot easier by understanding how trends develop and change direction based on my theory of key bars and buy and sell pivots, combined with the theory of how distributions of prices develop and resolve.
That last paragraph may leave you scratching your head, but if you take the time to watch the video, I set out for you in very clear language how prices have evolved in the Financials Index over the past 20 years based on the various aspects of my trading model.
By using the quarterly charts, a lot of the noise is eradicated and the large trends can be explained. The concept of key bars within a trend is very powerful if fully understood. As a trend develops the key bars become the building blocks of the trend and calculations can be made using the range of the key bar to find solid risk/reward opportunities.
When analysing the Financials Index based on this methodology it becomes clear that the Financials are now racing up into the sell zone of the current quarterly key bar. If prices continue to rally and we see a close above the high of the key bar at the end of March, that will be a quarterly buy pivot which will indicate a shift in momentum and possible shift in trend. But until that happens this area is where selling pressure should re-emerge, so I am waiting for the short-term charts to indicate a shift in momentum back to the downside.
By using a model such as this, the decisions made are based on concrete definitions rather than by the seat of the pants. You never know what the future holds, but you can manage your risk effectively by understanding how trends develop and change direction.
Editor, Alpha Wave Trader