Interactive Investor

Chart of the week: is it time to take profits in Lloyds?

The stock has run into strong headwinds, and some reversal looks likely.

1st June 2021 13:54

John Burford from interactive investor

The stock has run into strong headwinds, and some reversal looks likely.

One of the greatest challenges for traders and investors alike is deciding when to take profits on a position trade. As is often said, it is an easy matter to enter a position but difficult getting out, especially when you have racked up large gains. All kinds of strong emotions are usually involved.  

Most will cling on even tighter as their share price rises, as that helps confirms their wise decision to buy. And when the market inevitable falls back, that 'buy-and-hold' mentality results in riding the downturn – sometimes back to your entry or even beyond. Then, feelings of regret emerge that you failed to take profits near the high when you had the chance. And hindsight cannot alter that decision!

Some old pros begin every day asking: if I were a neutral observer, is my share at a price where I would buy, sell or hold it?

So I will today suggest that it is prudent to begin taking at least some profits in Lloyds (LSE:LLOY) in the days ahead.

Briefly, I took a contrarian bullish stance in Lloyds (and Barclays (LSE:BARC)) about a year ago following the 2020 coronavirus market crash. I believed the selling had been overdone and the UK banks were in line for bumper results as the economic shock effects of the pandemic were likely to be short-lived. 

And little did I know the housing market (for mortgages) would stage such a stunning surge, boosting the shares of the retail banks.

Lloyds posted a low of 21p in September last year, and has now reached a recovery high of 50p for a gain of 140%. But it has moved into major chart resistance on huge momentum – and to me, that is an amber warning signal.

This is the weekly chart and shows the market has moved up into the area of the pink chart resistance (shades of the FTSE chart I have been posting?):

Past performance is not a guide to future performance.

The arrows on the left depict three important lows and the current position – all at the 50p region.

Meeting the area of the three previous chart points implies this area is in a potentially serious resistance zone. 

Adding to this is the important Fibonacci 62% level just ahead at the 52p mark and also the downward gap of February 2020. 

Closing that gap at the 55p level – a normal event – would suggest the market would then retreat off that level, as is customary.

The other bearish clue is the entire recovery has the appearance of a three-wave pattern – and these are always corrective to the one larger trend (down).

Another potential negative is the upcoming phasing out of the furlough and mortgage interest relief schemes.

At present, there seems near-unanimous agreement that the UK economy is about to bounce back very strongly. But if that falls short in some way, the disappointment would be reflected in severe share declines.

All in all, I believe I have made a solid case that the shares are now encountering strong headwinds and that a reversal down most likely lies straight ahead and that serious consideration to taking at least some profits could be made. At the very least, a dip from my 50p–55p target area should produce a move down to the 36p region.

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.

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