Small bank, big potential
The banking sector has been popular since the market turned around mid-last year, with much of the attention on the big four. But there are interesting opportunities in some of the smaller players, and this week Paul Ash, Victorian president of the Australian Technical Analysts Association, has drawn up a chart of Bendigo and Adelaide Bank.
The bank has had a solid run-up since touching a three-year low of $6.82 in May 2012. In the following year, it gained 66 per cent and reached a high of $11.38 this May before the market suffered a significant setback. That correction saw Bendigo slide about 18 per cent to $9.30.
The stock has recovered from those lows, but has not yet bettered its May highs. We can use technical analysis tools to check the strength of the rally and give investors an idea of the recovery's sustainability.
To do this, the chart divides Bendigo's fall from its May highs using Fibonacci number ratios, with the May top being 100 per cent and the June low of 0 per cent. Following the May downturn, the stock found support at the 50 per cent Fibonacci level before falling to its nadir. Then as the recovery began, there was resistance at the 38.2 per cent level, the inverse of the significant Fibonacci level of 61.8 per cent. After three attempts to breach it, the 38.2 per cent resistance level turned into a support, as did the 50 per cent level once it was breached. Now the 61.8 per cent level has also turned into a support, which has held in the face of several declines since. Bendigo's price has remained above the 61.8 per cent level for three weeks, an indication of strength to technical analysts.
An extra sign of strength in the chart is that the price has remained above $10.60 (the high touched back in February) for three weeks, which represents another resistance level turning into a support.
Using a candlestick chart that measures intraday as well as closing prices, the 61.8 percentage line comes out at $10.60. That is a further sign of strength (the candlestick chart is too complex to show here).
The 30-day moving average line gives us another indication of strength. From November to May, the 30-day line represented a support level rising with the share price. The May bust saw the stock fall through the average, which also turned down as the rout gathered steam.
More recently, the average has turned up with the share price crossing it on July 5, and once again the 30-day line is assuming a support role.
The next point of resistance is the old high of $11.38. Traders will be watching for signs of weakness if that level is approached. Should it break through May's high, there is a strong likelihood the uptrend will continue.
On the fundamental side, Bendigo is trading on a price-earnings ratio of 12.8 times , slightly lower than the sector average. It is growing its earnings about 18 per cent a year and is paying a 60¢ dividend, representing a 5.56 per cent yield.
Banking on a rise