Interactive Investor

Chart of the week: can Lloyds Bank shares continue this recovery?

13th September 2022 07:59

John Burford from interactive investor

After a strong September so far for Lloyds shares, analyst John Burford explains what his charts tell us about possible future direction, and whether this rally has legs.  

Rates are higher – Lloyds Bank will follow

I make no excuses for returning to Lloyds Banking Group (LSE:LLOY) as it is the UK's largest consumer-focused bank – and its shares are at an interesting juncture. It is a share I have followed closely since my early days with COTW, and it is one of the most heavily traded UK shares with a very wide following.

But in terms of buy-and-hold, it has been an utter disaster, falling from its 545p all-time high at the start of the Millennium to the depths of the Credit Crunch low in 2009 to the absolute bargain basement price of 16p for a loss of an astounding 97%.

That kind of loss is usually associated with debt-ridden over-hyped crypto start-ups, not one of the UK's major banks. The extreme selling was prompted by the fearful vision of our banks going the way of Northern Rock.

But since that low, the shares have made very fitful moves higher (with large dips along the way). In fact, it has turned out to be a very popular day trading share, but does it have longer-term potential for gains? I believe it does.

The Corona Crash a little over two years ago produced another sharp decline to the 23p low and, since then, the shares have edged higher. Note that this very slight improvement took place when interest rates were abnormally low and house prices and housing activity were very high. Thus, profit margins on mortgage loans were unusually thin.

And with interest rates now perking up, margins are set to improve markedly. Overall profits could more than compensate for the expected drop in house prices and activity that may or may not materialise.

Also, we have a brand-new government that seems committed to revamping Treasury operations and restoring market's belief in its competence. We may also see changes in how it deals with the Bank of England.

But what are the charts telling me? 

Past performance is not a guide to future performance.

I have excellent tramlines on the daily chart, with the significant break of the upper tramline on 19 July that heralded a bull phase.

A normal pull-back to the 43p low on 2 September was met with heavy buying. Note that this low fell far short of a 'kiss' on the upper tramline which is the normal expectation – and this demonstrates a very strong buying presence.

Provided this low can hold, my first target is the 50p region, with solid potential to reach my next target at the old high at 56p.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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