CBA will announce its results next week, having rallied 19.5% from the low in late May.
From a technical analyst’s point of view, the CBA chart caught my eye as one showing the early signs of a potential reversal set up.
This situation can be useful for traders. It creates a logical reason to sell with a relatively close stop loss but the possibility of a relatively large and often quite fast decline if news breaks the right way for the trading position.
Price has departed a long way from the 200 day moving average (green line). At some stage this is likely to be corrected.
The first reversal clue at the moment is that we are in the early stages of what could develop into a double top formation.
This would happen if price falls leaving yesterday’s high as a trend peak at about the same level as last week’s peak. The double top pattern would be completed by a break below the trough between the two peaks. This break would also represent a break below the 20 day moving average (middle Bollinger Band).
The Bollinger Bands provide a second reversal clue. This first trend peak in our potential double top or “M” type formation was made above the upper Bollinger band. But the second peak might be below it. This would indicate declining momentum which can be an early reversal indicator. This would in turn be a clue that early entry to the double top is justified rather than waiting for a break below the dashed support line.
One approach to strategy in this situation is to sell on the first close below the candle that makes the 2nd peak. As things currently stand this would involve selling on a close below yesterday’s low.
Another possibility here is that price will push a bit higher but still make a 2nd peak below the upper Bollinger Band. This would still be typically be used as a sell set up under this type of strategy. The advantage of the Bollinger Bands here is that they indicate that there may still be a reversal set up in play even though it doesn’t look like a double top to the naked eye.
A typical stop loss approach would be to place it just above the 2nd peak in the M formation. A move above that level is a failure waring indicating that the uptrend is resuming.
In technical terms a sell reversal set up from here suggests the possibility of a retracement of the move up from 48.55 in late May. As long as this does not overlap below the last major peak at $53 the overall bullish outlook for the chart would remain in place.
Typical retracement targets would be 38.2% to around $54.40 or 50% to around $53.30