Chart of the week: Barclays shares could do this next

This lesson in economics gives us a big clue which way high street bank shares may be heading.

Barclays remains in downtrend

When major bank shares are weak, as they are, it is a reflection of the state of the economy. When the economy grows, demand for loans is strong and bank earnings improve and vice versa.

It is a curious fact that many pundits are now expecting inflation and some even expect hyperinflation as central banks are creating even easier money than during their quantitative easing (QE) episodes. And they reckon goods and services will be in shorter supply now with the current pandemic shutting producers’ operations. So, more money chasing fewer goods/services = higher prices.

Sounds right, doesn’t it? They point to the surging gold price as evidence inflation is here - after all, isn’t gold a traditional hedge against inflation?

But, if this is true, why are bank shares at or near multi-year lows? And crude oil – that most critical indicator of inflation/deflation – also at multi-year lows?

Actually, the term ‘inflation’ is used very loosely today – even by those who should know better: economists. As is its opposite – deflation. Commonly, it means a general rise in prices (inflation) or a decline (deflation).

But these are simply by-products of what inflation/deflation actually is. I believe the evidence points clearly to the global economy entering a period of deflation, which is a period where the desire and ability of people to lend and borrow is diminishing. And, when that happens, prices generally trend lower, which is what we are seeing today. Recent Producer Price Index (PPI) and Consumer Price Index (CPI) data certainly confirm that.

And with a reduction in loan volumes, bank shares decline, which is also what we are seeing – and have done for years.

• Barclays shares surge to one-month high
• Aston Martin: should you buy the shares at this level?
• Chart of week: Barclays vs Deutsche Bank

Getting back to Barclays (LSE:BARC), it made its all-time high in 2007 at £7.75, and has been in a solid bear trend since then, reaching a low of 73p in March. So what does that tell you about the underlying state of the UK economy?  

If it were not for the desperate government schemes to prop up the housing market, among others, relatively free-market market forces would have pricked that bubble years ago.

Here is the latest share chart:

Source: interactive investor. Past performance is not a guide to future performance.

I last covered Barclays on 6 January, just before the Corona Crash, which I have labelled wave 3 to the 19 March low. The recovery since then has been relatively weak compared with the relief rally in the FTSE 100 – and has a textbook form of an a-b-c triangle.

My forecast is for a new wave 5 below the wave 3 low at 73p. Then, odds favour a very strong rally phase that should be tradable. I will try to identify the turning points.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com. 

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.