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Buy When In A Correction

04/18/13 02:37:25 PM
by Koos van der Merwe

When everyone is selling, that is when you should buy. The problem is, what do you buy?

Security:   BCS, RBS
Position:   Accumulate

When the market corrects, as it is now doing, you should start preparing a list of stocks you wish to buy. The best way to find those stocks is to look at a weekly chart, determine its trend, and then sit back and wait for the weekly chart to tell you when to buy. Then look at a daily chart to finalize what day to buy.

Over the past years, banks have been knocked pretty badly by the market, because of their previous greed, but with the new tight controls being implemented and in some cases, a change in top management, banks are worth looking at for a future buy. One bank that has caught my attention, besides Citigroup, Bank of America, JP Morgan Chase and others worth looking at, is Barclays Bank. Barclays Bank (BCS) is a British bank, and is listed on the New York Stock Exchange as an ADR (American depositary receipt). It is a bank that never looked for government support during the financial crises. As England starts righting itself, and the economy starts recovering, this bank could be a good investment.

Figure 1: Barclays Bank weekly chart.
Graphic provided by: AdvancedGET.
The weekly chart of BCS shows how the price fell from $62.68 in March 2007 to a low of $2.78 by January 2009. The price then rose in a WAVE I of a new bull market to $25.66 by September 2009. From that date, the share price fell in a lengthy WAVE II correction bottoming at $9.13 in September 2011. From that date it has completed a Wave 1 and Wave 2 of a WAVE III. The rise has been slow, but has met the Fibonacci retracement levels. Note how WAVE I rose to the 0.382 (38.2%) of the Fibonacci retracement from the WAVE V high of $62.68 to the low of WAVE C at $2.78. Note also how Wave 2 of WAVE III corrected to $9.13, the 72% retracement level. Note how wave iv of Wave 3 appears to have found support at $16.83, the 38.2% retracement of the Fibonacci correction of WAVE I. The trendline drawn suggests that the price should start rising possibly to test the high of WAVE I at $25.66. A negative, and a strong one at that, is the RSI indicator, which is showing weakness.

Figure 2: Royal Bank Of Scotland weekly chart.
Graphic provided by: AdvancedGET.
The chart in Figure 2 is a weekly chart of Royal Bank of Scotland (RBS). RBS did accept government money to survive, with the government at one stage owning 70% of the Bank. The share price fell from $216 to $2.85 by January 2009. The chart pattern looks similar to that of BCS in Figure 1, but the Fibonacci retracement targets were not met. The Elliott wave count does look similar, but in Figure 2 the pattern is suggesting a wave ii correction of Wave 2 of WAVE III. The RSI is trending down, and has not yet given a buy signal.

Both charts are suggesting that a bottom in the British banks is due in the not too distant future. You should watch the weekly charts, and when the RSI indicator gives a buy signal, look at the daily charts and consider adding one of the banks to your portfolio.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

Address: 3256 West 24th Ave
Vancouver, BC
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