The ASX 300 Banks index is retracing to test the primary support level at 8000 breached 3 weeks ago. Trend Index peaks below zero warn of selling pressure. Respect of resistance at 8000 is likely and would warn of a primary decline to the 2016 low at 7100.
The Royal Commission on banking is having a two-fold effect on the market. First, airing of banks’ dirty laundry in public has increased investor concerns, leading to a sell-off in banking stocks. But the second effect may be more significant. Banks are expected to tighten lending standards as a result of the commission, which will slow credit growth. Slower credit growth would result in falling house prices as new buyers struggle to obtain finance, except at lower LVRs and higher interest rates. Falling house prices in turn would encourage banks to further tighten lending standards. Slower lending growth and higher default rates would both impact on bank earnings….. and stock prices.
Adding to ASX misery, the Resources sector is undergoing a correction, now in its third month, with the ASX 300 Metals & Mining index heading for a test of support at 3250.
The ASX 200 index is retracing to test its former primary support level at 5800. Bearish divergence on Twiggs Money Flow warns of selling pressure. Respect of resistance is likely and would confirm a primary down-trend. Breach of the mid-2017 lows at 5650 would strengthen the bear signal, offering a target of the June and November 2016 lows at 5050.